Nvidia's revenue is bigger story than gross margins moving forward, says Susquehanna's Chris Rolland

Key Concepts

• Nvidia's Financial Performance: Discussion of revenue, gross margin, free cash flow, and future projections.
• 500 Billion Dollar Figure: Analysis of its meaning, potential upside, and components (compute, networking).
• Gross Margin: Target of mid-70s achieved, with potential for high-70s.
• Free Cash Flow: Lower than street expectations due to inventory build-up.
• GPU Depreciation: Focus on accelerated depreciation versus useful life, and its impact on profitability.
• Component Availability: Mention of memory and front-end TSMC as potential constraints.

Nvidia's Financial Outlook and Projections

The discussion centers on Nvidia's recent financial performance and future outlook, with a particular focus on a significant figure of $500 billion. While the company's reported earnings were $22 billion, the analysts are more interested in the forward-looking projections.

Key Points:

• Revenue: The $22 billion revenue figure is mentioned but quickly overshadowed by discussions of future potential.
• $500 Billion Projection: This figure is a major point of interest. There's a debate about its exact meaning and whether there's potential for upside beyond this number.
  • Upside Potential: Analyst Chris Rolland believes there could be upside to the $500 billion figure, suggesting it might represent a backlog. If component availability (like memory or front-end TSMC) improves, Nvidia could potentially exceed this number.
  • Current Model vs. Projection: Rolland's current model is at $450 billion, leaving a 10% margin to the $500 billion street model, indicating potential for "beats and raises" over the next two to three quarters.
  • Components of the $500 Billion: This figure includes not only compute (Blackwell GPUs) but also associated networking. While above the street's expectations, it might not be the 30% Tim mentioned, but perhaps 20% or 15% higher.

Gross Margin Analysis

Nvidia achieved its target for gross margin, and analysts are optimistic about further improvements.

Key Points:

• Target Achieved: The company hit the mid-70s for gross margin, a figure that some on the buy-side were skeptical about.
• Future Outlook: Analysts believe the gross margin could move into the high 70s, though reaching the 80s is considered unlikely at this point.
• Impact on Valuation: While important, gross margin is seen as less of a driver for valuation going forward compared to revenue.

Free Cash Flow and Inventory

Free cash flow came in lower than expected, attributed to strategic inventory management.

Key Points:

• Reported Figure: Free cash flow was reported at "22 and change," which was below the street's expectation of "a little over 27."
• Reason for Lower Figure: This shortfall is explained by an increase in inventory. This build-up is a direct response to the component dynamics and the observed memory shortage.
• Analyst Perspective: Despite the lower number, analysts suggest this is not a critical concern at this moment, implying it's a tactical move rather than a fundamental weakness.

GPU Depreciation and Profitability

A significant discussion point is the accounting treatment of GPU depreciation, with implications for reported profitability.

Key Points:

• Focus on Useful Life: The current conversation is centered on the "useful life" of a GPU.
• Nvidia's Revenue from Older Chips: Nvidia has generated $2 billion in revenue from older Hopper chips, which is relevant to the depreciation discussion.
• Accelerated Depreciation: The more impactful change, according to Chris Rolland, would be a shift to "accelerated depreciation" rather than a debate about the "useful life."
  • Useful Life vs. Value: While GPUs might have a useful life of ten years, the majority of their value is realized in the first two years.
  • Impact on Profitability: Overstating profitability is a concern. If depreciation is not accelerated, the current profitability figures, including those of cloud GPU vendors, might be inflated.

Component Availability and Supply Chain

The availability of key components is identified as a potential bottleneck and a factor influencing future projections.

Key Points:

• Memory Shortage: A memory shortage is explicitly mentioned as a factor impacting inventory and potentially future production.
• TSMC: Front-end TSMC is also cited as a component whose availability could influence Nvidia's ability to exceed the $500 billion projection.

Logical Connections and Overall Narrative

The transcript weaves together several interconnected themes:

1. Financial Performance as a Foundation: The reported $22 billion revenue sets the stage for discussions about future growth.
2. The $500 Billion Projection as a Key Driver: This figure becomes the focal point for understanding Nvidia's future potential, with analysts dissecting its components and exploring upside possibilities.
3. Operational Factors Influencing Projections: Gross margin improvements and strategic inventory management (leading to lower free cash flow) are presented as operational aspects that support or temper the growth narrative.
4. Accounting Nuances Impacting Perception: The debate around GPU depreciation highlights how accounting practices can affect the perceived profitability and, by extension, the valuation of the company and its peers.
5. Supply Chain as a Critical Constraint: The mention of memory and TSMC availability underscores the real-world limitations that could impact Nvidia's ability to capitalize on its strong demand.

Conclusion

The discussion highlights Nvidia's strong financial position and optimistic future outlook, particularly concerning the $500 billion projection. While the company has met key financial targets like gross margin, analysts are keen to understand the specifics of the $500 billion figure and its potential for upside, which is contingent on improved component availability. The conversation also touches upon the accounting treatment of GPU depreciation, suggesting that accelerated depreciation would provide a more accurate picture of profitability. Despite a lower-than-expected free cash flow due to inventory build-up, the overall sentiment remains positive, with a focus on revenue growth as the primary valuation driver.