Nvidia shares in focus after Q3 earnings smash expectations thanks to AI boom

This tech giant is growing at a spectacular rate thanks to artificial intelligence.

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Nvidia Corp (NASDAQ: NVDA) shares will be watched closely when Wall Street opens tonight.

That's because the US$1.2 trillion dollar chipmaker has just released its third-quarter update.

The initial reaction has been reasonably mixed, with Nvidia's shares falling slightly in after-hours trade. Let's see what the company reported.

Nvidia shares on watch following Q3 update

  • Revenue up 206% to US$18,120 million
  • Gross margin improved 20.4 percentage points to 74%
  • Operating expenses up 16% to US$2,983 million
  • Net income up 1,259% to US$9,243 million
  • Diluted earnings per share up 1,274% to US$3.71

What happened during the quarter?

All sides of Nvidia's business were on form during the three months ended 30 September. However, the star of the show was the company's key Data Center segment, which reported a 279% increase in revenue to a record US$14.51 billion.

Also performing strongly was the Gaming segment, which delivered an 81% increase in revenue to US$2.86 billion.

Continuing the positive trend, Nvidia reported a 108% increase in Professional Visualization revenue to US$416 million and a 4% lift in Automotive revenue to US$261 million.

Pleasingly, with Nvidia improving its gross margin by 20.4 percentage points and restricting its operating expense growth to just 16%, the company's earnings grew at an explosive rate.

Net income on a GAAP basis was up a staggering 1,259% over the prior corresponding period to US$9,243 million. Diluted earnings per share rose a fraction quicker at 1,274% to US$3.71 on a GAAP basis and 49% to US$4.02 per share on a non-GAAP basis.

As a comparison, the market was expecting revenue of US$16.18 billion and non-GAAP earnings per share of US$3.37 per share according to CNBC. Two very big ticks for Nvidia and its shares.

'The era of generative AI is taking off'

Nvidia's founder and CEO, Jensen Huang, highlights that the company's growth has been driven by the transition to accelerated computing and generative AI. He commented:

Our strong growth reflects the broad industry platform transition from general-purpose to accelerated computing and generative AI. Large language model startups, consumer internet companies and global cloud service providers were the first movers, and the next waves are starting to build.

Nations and regional CSPs are investing in AI clouds to serve local demand, enterprise software companies are adding AI copilots and assistants to their platforms, and enterprises are creating custom AI to automate the world's largest industries. NVIDIA GPUs, CPUs, networking, AI foundry services and NVIDIA AI Enterprise software are all growth engines in full throttle. The era of generative AI is taking off.

Outlook

One thing that may have held Nvidia shares back in after-hours trade was its outlook statement.

Management revealed that it expects revenue to be "US$20.00 billion, plus or minus 2%" in the fourth quarter. This represents an increase of approximately 230% year on year.

However, while this is once again ahead of the market's expectations, it relies heavily on some regions offsetting weaker sales in China and other markets due to export restrictions. Management said:

Our sales to China and other affected destinations, derived from products that are now subject to licensing requirements, have consistently contributed approximately 20-25% of Data Center revenue over the past few quarters. We expect that our sales to these destinations will decline significantly in the fourth quarter of fiscal 2024, though we believe the decline will be more than offset by strong growth in other regions.

Nvidia shares are up over 200% since this time last year.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Nvidia. The Motley Fool Australia has recommended Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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