Nvidia: There was a red flag in its earnings report, but is the stock still a buy?

The company's fate is becoming more tied to one large customer.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Key Points

  • Nvidia has again saw its revenue continue to surge.
  • Demand for its chips remains insatiable.
  • However, its ballooning accounts receivables is a red flag investors need to monitor.

Nvidia (NASDAQ: NVDA) continued its streak of remarkable revenue growth in its third quarter (ended Oct. 26), as demand for its graphics processing units (GPUs) remains insatiable. However, there was one red flag in its report that investors should be aware of moving forward. Nonetheless, the stock jumped on the results, and it is now up more than 40% on the year.

Let's dig into Nvidia's results and prospects to see whether investors should buy the stock or take some profits.

Strong revenue growth, but...

Nvidia once again reported remarkable revenue growth, especially for a company of its size. For its fiscal Q3, its revenue soared 63% to $57 billion, easily topping the $54.9 billion consensus as compiled by LSEG. Adjusted earnings per share (EPS), meanwhile, climbed 67% to $1.30, coming in ahead of the $1.25 analysts expected.

Data center revenue was once again Nvidia's biggest growth driver in the quarter, with revenue jumping 66% to $51.2 billion, helped by momentum with its Blackwell chips. Within its data center segment, its networking portfolio also once again shone, with revenue surging 162% $8.2 billion. The company credited the growth to its NVLink interconnect solution, as well as its InfiniBand and Spectrum-X Ethernet products. Its report highlighted that Meta Platforms, Microsoft, and Oracle are all building huge AI factories using its Spectrum-X Ethernet switches.

On its call, Nvidia management said it saw no signs of an artificial intelligence (AI) bubble and that demand continues to exceed its expectations. Management noted that its cloud GPUs were sold out and that all generations of its GPUs are being fully utilized.

In a direct counter to famed investor Michael Burry's bearish argument on the AI infrastructure space, Nvidia also said that its older A100 GPUs that were shipped six years ago were still running at 100% utilization in large part thanks to its CUDA software platform. Burry had argued that the useful life of GPUs is only two to three years. Thus, cloud computing companies were overstating their earnings because their GPUs had been depreciating over the six years.

The company also noted that despite getting a license to sell its H20 chips in China, revenue was minimal in the quarter, with only about $50 million in sales.

Nvidia's other segments also produced solid results. Gaming revenue jumped 30% to $4.3 billion, while its professional visualization segment sales soared 56% to $730 million. Meanwhile, its automotive segment saw revenue climb 32% to $592 million. The strong auto performance was driven by self-driving solutions and partnerships like the one it established with Uber.

The company continues to be a cash-flow machine, generating operating cash flow of $23.8 billion and free cash flow of $22.1 billion in the quarter. It ended the quarter with cash and marketable securities of $60.6 billion and $8.5 billion in debt after buying back $12.5 billion in stock in the quarter.

Looking ahead, Nvidia guided for Q3 revenue to come in around $65 billion, which would represent 65% growth. The forecast does not assume any data center revenue coming from China.

While the report and guidance were strong, the one red flag with Nvidia's report was that the company continues to see its accounts receivable balloon. During the quarter, this metric climbed 89% year over year to $33.4 billion, outpacing its sales growth. Accounts receivable is how much money is owed to the company for products that have been shipped. Continued big jumps in this metric can be a sign of channel stuffing or collection problems. Given that Nvidia has started to make investments in its customers, like OpenAI and Anthropic, this makes it even more notable, as the chipmaker is essentially providing the cash these companies need to help buy its chips. This type of circular financing likely isn't sustainable over the long run. 

Is Nvidia stock still a buy?

While I think investors need to be aware of the potential pitfalls of Nvidia's circular financing and ballooning accounts receivable issue, I wouldn't dump the stock yet. The company is still seeing incredible growth and generating a ton of cash. The insatiable demand for its chips is real, and the company has created a wide moat through its CUDA software platform and NVLink interconnect solution, which helps its chips act like one powerful unit.

Whether this red flag becomes a problem in the future will likely come down to OpenAI. The AI model company is looking to spend aggressively on building out AI infrastructure, but it is currently losing money and burning through cash. However, it's also tied itself to nearly every major player in the AI space, perhaps making it too important to fail. However, this is not something that will play out until years down the road.

In the meantime, I'd expect Nvidia to continue to produce robust growth and continue to be one of the biggest beneficiaries of AI. As such, I view the stock as a buy, with the caveat that I'd continue to monitor this risk.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Geoffrey Seiler 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 Meta Platforms, Microsoft, Nvidia, Oracle, and Uber Technologies. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Meta Platforms, Microsoft, and 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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