Nvidia qualifing more manufacturing partners to secure explosive growth momentum

Fabless chipmaker Nvidia's latest earnings report highlights its role as a barometer of the AI industry's ascendancy. Nvidia's sustainability in its momentum hinges on TSMC's CoWos capacity, and Nvidia is increasing supply partners to ensure its growth is on track.

Nvidia released its earnings report for the fiscal second quarter that ended in July, posting record revenue of US$13.51 billion, up 101% from a year ago and an 843% growth year-on-year in net income. Sales for Nvidia's data center grew 171% to US$10.3 billion.

In a press release, Nvidia founder and CEO Jensen Huang said that a new computing era has begun. Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI, and leading enterprise IT system and software providers partnered with Nvidia, adding that the race is on to adopt generative AI.

According to Nvidia's guidance, revenue for the third quarter may grow to US$16 billion, plus or minus 2%, more than doubling that for the corresponding quarter in 2022. GAAP and non-GAAP gross margins are expected to be 71.5% and 72.5%, respectively, plus or minus 50 basis points.

Besides the data center business, which grew 171% year-on-year, the gaming and auto businesses saw a 21.74% and 15% increase in sales, respectively. The professional visualization business experienced a 23.59% fall in revenue compared to a year ago.

The industry is closely watching Nvidia's performance as an indicator to see whether the AI wave is a one-time hype or a long-term trend. Wedbush analyst Daniel Ives said that these outcomes and projections mark a significant point in the technology industry's history, considering the imminent surge in AI investment expected in the upcoming years. Citi said in a note that the results and outlook reflect continued AI demand strength and the growth in Nvidia's data center business was impressive.

Supply and China risks

According to Bloomberg Intelligence analyst Kunjan Sobhani, a substantial outperformance in the fiscal second quarter and a continuation of the fiscal first quarter's achievements indicate a consistent robust demand for Nvidia's data center business. Moreover, the guidance, surpassing the consensus by 29% for the fiscal third quarter, suggests that the company might access a supply that exceeds initial expectations, as Nvidia's growth momentum depends on TSMC's capacity.

Semiconductor analyst Andrew Lu said on a Facebook post that Nvidia announced that its inventory days is only 3.2 months, lower than the 3.5 months anticipated three months ago, a decrease of 41% quarter-on-quarter and an increase of 4% from the previous year. Lu said the inventory days for the fiscal third quarter will continue to decline unless there is a rapid increase in TSMC's CoWoS capacity, adding that AMD might place orders for Samsung due to the tight supply of CoWoS and cheap HBM3.

Nvidia CFO Colette Kress said that supply partners had been exceptional in ramping capacity, and Nvidia also developed and qualified additional capacity and suppliers for key steps in the manufacturing process, such as CoWoS packaging. Supply is expected to increase each quarter through next year.

Huang also said that Nvidia is significantly expanding product production capacity, and supply will substantially increase for the rest of this year and next year.

As for the China market, which accounts for 20–25% of Nvidia's data center revenue, Kress said Nvidia does not anticipate that additional export restrictions on the data center GPUs, if adopted, would have an immediate material impact on the financial results. Kress said, however, that over the long-term, restrictions prohibiting the sale of data center GPUs to China, if implemented, will result in a permanent loss of an opportunity for the US industry to compete and lead in one of the world's largest markets.

Source: Nvidia, August 2023

Source: Nvidia, August 2023