Morning Note: Market news and an update from NVIDIA.

Market News

US equities gave back some of their recent gains last night: S&P 500 (-0.6%); Nasdaq (-1.1%). Markets fell further after hours after solid Nvidia results (see below) failed to meet the most optimistic expectations. Salesforce rose postmarket after boosting its fiscal-year profit forecast, while CrowdStrike and HP fell on full-year outlook cuts. According to the Wall Street Journal, Microsoft is in talks to raise several billions of dollars in a new funding round that would value OpenAI above $100bn.

Raphael Bostic said it “may be time” for the Fed to cut but he’s still looking for additional data to support lowering rates next month. Later today, the second estimate for US Q2 GDP and the latest initial jobless claims will be released, with the Fed’s preferred inflation measure, the PCE price index report, due tomorrow. The dollar weakened, while the 10-year Treasury currently yields 3.84%. Gold moved higher to $2,516 an ounce.

In Asia this morning, markets were little changed: Nikkei 225 (flat); Hang Seng (+0.3%); Shanghai Composite (-0.4%)

TSMC shares fell. Bloomberg suggested the yen has turned a corner and is set to keep grinding higher due to narrower interest-rate differentials, Japan’s improving external balance, and hedging demand from local investors.

The FTSE 100 is currently trading 0.2% higher at 8,350. Companies trading ex-dividend today include Diageo (1.89%), Glencore (1.22%), IHG (0.53%), LondonMetric Property (1.38%), and PageGroup (1.33%). Sterling trades at $1.3219 and €1.1878.

European auto sales stagnated in July as EV demand plummeted in Germany. The ACEA reported total car registrations (EU+EFTA+UK) up only 0.4% to 1.025m units. Strength at Toyota (+15.6%), Mercedes-Benz (+4.4%), and BMW (+3.7%) was offset by weakness at Ford (-21.6%) and Tesla (-14.8%).

Source: Bloomberg

Company News

Last night NVIDIA released results for the three months to 28 July 2024, the second quarter of its financial year to January 2025. Although growth was strong, the pace of expansion decelerated compared to previous quarters, while guidance for the current quarter fell short of some of the most optimistic forecasts. In response, the shares fell 7% in after-hours trading.

NVIDIA is one of the world’s largest semiconductor companies, with a leading market share in Graphics Processing Units (GPUs). From its original focus on PC graphics, the company has expanded to several other large and important computationally intensive fields, leveraging its GPU architecture to create platforms for scientific computing, AI, data science, autonomous vehicles, robotics, metaverse, and 3D internet applications.

The company is benefitting as data centres make a platform shift from general computing, primarily using central processing units (CPUs), to accelerated computing, primarily using GPUs, which brings significant improvements in performance, energy efficiency, and cost.

Accelerated computing’s ability to significantly speed up machine learning and to deal with large data sets has enabled the development of generative artificial intelligence (AI), which offers human-like computing performance. This is driving significant investment in new enterprise applications, which is in turn driving new demand for accelerated computing.

In the latest quarter, Nvidia’s revenue rose by 122% to $30bn, exceeding the company guidance of $28bn, plus or minus 2%, and the market forecast of $28.7bn. The print was 15% higher than the previous quarter.

The vast majority (88%) of revenue is generated in the Data Centre division, with 45% derived from cloud service providers and the remainder from consumer internet and enterprise companies. During the quarter, revenue increased by 154% to $26.3bn, driven by demand for the group’s Hopper GPU computing platform for training and inferencing of large language models, recommendation engines, and generative AI applications. The company addressed the delay to the next generation Blackwell platform, highlighting changes made to improve manufacturing yield. Production is scheduled to ramp up in Q4.

The smaller divisions performed as follows: Gaming (+16% to $2.9bn); Professional Visualisation (+20% to $454m); and Automotive and Robotics (+37% to $346m)

Gross margins are high and rose from 71.2% to 75.7%, at the upper end of the group’s guidance of 75%-76%. Operating expenses rose by 52% to $2.8bn, in line with the company guidance of $2.8bn. Earnings per diluted share was up 152% to 68c, versus the market forecast of 64c.

The business is very cash generative, with free cash flow up 123% to $13.5bn in the three months to 28 July. The company’s balance sheet is very strong, with net cash of $26bn at the end of the quarter. The cash is being used, in part, for shareholder returns, including $7.2bn in share repurchases, leaving $57.5bn of authorisation. The company also pays a dividend, with a payout of $0.01 declared for this quarter, up 150%.

For the current quarter, the company is guiding to revenue of $32.5bn, plus or minus 2% and a gross margin of 75%. Despite an expectation of continued strong growth, the guidance fell short of the most optimistic forecasts. For the full year, gross margins are expected to be in the mid-70% range, while operating expenses are now expected to grow in the mid- to upper-40% range (versus low-40% range previously).

Source: Bloomberg