Key Points
Nvidia reported outstanding second-quarter results.
Demand from its most important clients remains strong.
There is no end in sight for Nvidia's amazing run.
On Aug. 26, Nvidia (NASDAQ:NVDA) reported its financial results for the second quarter of its fiscal year 2027, which ended July 26 (Nvidia's fiscal years do not align with calendar years). The company went into its update with high expectations, as always. In fact, despite revenue and earnings beats in several of its most recent quarters, the stock moved south post-earnings. So, it would take a particularly strong performance for the market to be genuinely impressed. And that's exactly what Nvidia delivered. Let's look deeper into it.
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"Beat-and-raise" doesn't even begin to describe it
During the period, Nvidia's revenue came in at $96.2 billion, up 106% from the year-ago quarter. The company was well ahead of its own internal projections and analysts' estimates. A company of this size doubling its revenue is impressive. Nvidia is performing more like a smaller tech corporation still in its growth stages than a well-established leader in the cyclical semiconductor industry. But that was just the top line.
Nvidia's gross margin was 75%, higher than the 72.4% reported in the year-ago period. Operating income grew even faster than revenue, coming in at $63.7 billion, up 124% year over year, while the company's adjusted earnings per share were $2.22, 120% higher than the prior-year quarter. Nvidia's guidance for its next quarter was also strong. It expects revenue of $108 billion (at the midpoint), which would represent a year-over-year increase of 89.5%. It's not surprising that Nvidia jumped following its earnings report.
Sustained hyperscale demand is a bullish sign
Nvidia keeps refuting the bears' arguments. For instance, some have claimed that, since the hyperscalers -- or major cloud computing providers -- are increasingly relying on internally developed artificial intelligence (AI) chips, they will significantly reduce demand for Nvidia's Graphics Processing Units (GPUs). But these hyperscalers themselves have explicitly said that even as they ramp up production for custom AI chips, they will remain loyal Nvidia customers.
Amazon's (NASDAQ:AMZN) CEO, Andy Jassy, said as much, as did Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL), Sundar Pichai. These corporations are putting their money where their mouth is. During the second quarter, Nvidia recorded $48.7 billion in hyperscale revenue, up 13% quarter-over-quarter and 102% year-over-year.
Demand for AI cloud services seems to be so high that the hyperscalers can increase their reliance on custom AI chips and also order more of Nvidia's hardware and still be capacity constrained, as Amazon recently said it was. In fact, Nvidia announced a new deal with Amazon Web Services (AWS), Amazon's cloud computing arm.
AWS is deploying an additional 2 million Nvidia GPUs and other products across the semiconductor specialist's AI stack. That's great news for Nvidia, as it points to sustained demand for the company's products over the medium term from its most important customers.
A table-pounding buy
Nvidia has, time and time again, exceeded expectations, and there is still a vast opportunity for the company to tap into. Nvidia estimates that hyperscale capex will reach almost $800 billion this year (among the top five) and rise to roughly $1.3 trillion next year, with some of that flowing right into the company's pockets. Beyond its GPU business, the semiconductor leader is ramping up its CPU (Central Processing Unit) segment.
Nvidia is still projecting $20 billion in stand-alone CPU revenue during its current fiscal year, and more than double that in the next one. The company also maintains that it will return at least 50% of its free cash flow to its shareholders. Finally, Nvidia looks surprisingly affordable. The stock is trading at 23.9x forward earnings. Yes, that's higher than the 20.9x average for information technology stocks, but that's more than fair considering how fast Nvidia's revenue and earnings are growing, and the fact that it still sees significant demand for its products over the medium term. The bottom line: Nvidia remains a strong buy.
Prosper Junior Bakiny has positions in Alphabet, Amazon, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, and Nvidia. The Motley Fool has a disclosure policy.