Earnings preview: Nvidia and Snowflake

Key points in this equity note:

• This year’s AI hype has driven Nvidia’s equity valuation to excessive levels compared to other technology stocks.
  
  
• Nvidia’s Q1 earnings result tonight is expected to show a 21% revenue decline y/y, but then a strong growth rebound to 35% by Q3 driven by AI.
  
  
• Snowflake Q1 revenue growth is expected at 44% y/y coming down fast as technology spending is cooling.

Can Nvidia deliver on excessively high expectations for AI?

The most talked about equity theme this year has been AI due to the technical and commercial success of ChatGPT (OpenAI/Microsoft) and Bard (Google). Last week we wrote an equity note Google and Microsoft are battling for the lead in AI explaining how the AI landscape is developing on the application side. Earlier we also introduced our AI inspiration list so investors could get an overview of the different stocks that provide a various degree exposure to AI technology. But there is no doubt that the stock that has responded the most to the AI hype is Nvidia, which has become the second-most owned stock among Saxo clients highlighting Nvidia’s popularity.

There are also good reasons for why investors are betting on Nvidia. The company is designing and manufacturing the GPUs (graphical processing units, graphics cards) used in AI research and implementation, and thus Nvidia is selling the shovels used in AI race, which is our time’s gold rush. The AI hype has pushed Nvidia’s EV/Sales ratio to 24x which insanely high when compared to other technology stocks. Microsoft is currently valued at 10x EV/Sales and the equity valuation on Nvidia is definitely raising the stakes ahead of tonight’s FY24 Q1 (ending 30 April) earnings release. Nvidia delivered $27bn in revenue in FY23 (ending 31 Jan 2023) up from $4.3bn 10 years ago so long-term investors in Nvidia have been used to high growth rates. With machine learning applications, self-driving car research, gaming and crypto mining already driving future growth, the market expects AI to add another growth leg which is of course driving the high expectations.

Analysts expect FY24 Q1 (ending 30 April) revenue of $6.5bn down 21% y/y and EBITDA of $2.9bn down from $3.6bn a year ago as the impact from higher interest rates on crypto mining is still impacting revenue. The gaming industry is also not growing at the same levels and datacenter spending has also cooled because of higher interest rates. The key tonight is not the Q1 figures but rather the outlook for the current quarter (Q2) and the fiscal year outlook as analysts are expecting revenue growth to increase to 7% y/y in Q2 and then 35% and 42% respectively in Q3 and Q4 driven by pick up in all its businesses with AI research and deployment driven a lot of the growth. Expectations could not be higher and given the recent change in sentiment among economists on the US economic outlook the stakes are very high for Nvidia investors.