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[2024.8] How to look at the performance of Nvidia? The key indicator to watch for short-term stock prices.

[2024.8] How to look at the performance of Nvidia? The key indicator to watch for short-term stock prices. -1

One of the best performing technology giants in the U.S. stock market over the past two years, including $NVIDIA  (NVDA.US)$ . Since the beginning of the year, it has nearly doubled in gains, pushing Nvidia's P/E valuation close to 100 times.

Nvidia's significant surge may partly reflect market expectations for its new performance. After the post-market trading on August 28, Nvidia will release its Q2 earnings for the 2025 fiscal year. Each earnings release from the company may also signify a good trading or investment opportunity. However, before that, investors need to understand how to interpret its earnings.

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[2024.8] How to look at the performance of Nvidia? The key indicator to watch for short-term stock prices. -2

So, how should we analyze Nvidia's earnings? What are the factors that could have a significant impact on short-term stock prices? Let's take a look at the 4 main points of focus.

1. Actual performance/business performance guidance compared to expectations.

Previously, after experiencing nearly two years of downward cycle, the chip industry has rebounded due to the demand for AI-powered chips. And the leading company in AI chips, Nvidia, has shown the greatest reversal and performance flexibility in recent quarters.

Therefore, there may be a significant deviation between Wall Street analysts' predictions and Nvidia's actual performance. On the Futu app, we can see analysts' expectations for Nvidia's performance. If the actual performance significantly exceeds expectations, it may have a positive impact on the short-term stock price. On the contrary, if the actual performance is below expectations, it becomes a short-term bearish signal.

[2024.8] How to look at the performance of Nvidia? The key indicator to watch for short-term stock prices. -3

So what if Nvidia's performance does not exceed expectations by much? It may still have a certain degree of negative impact because the market has high expectations for Nvidia and has already reflected these expectations in the stock price. To further boost the stock price, being just satisfactory may not be enough, it may need to be outstanding.

In addition to observing actual performance, the performance guidance provided by management is also important. A significantly higher-than-expected performance guidance may trigger a surge in the stock price, while a lower-than-expected performance guidance may be a significant bearish signal for the short-term stock price.

For example, Nvidia's Q3 FY2024 quarterly report showed revenue of $18.12 billion, exceeding the market's expectations of $16.11 billion, and EPS of $3.71, also significantly exceeding expectations. In terms of performance guidance, Nvidia provided a revenue guidance of about $20 billion for Q3, slightly exceeding expectations. However, after the performance announcement, the market may have felt that Nvidia's performance was not exciting enough, and the stock price fell the next day.

By Q1 FY2025, Nvidia's actual revenue was $26 billion, significantly exceeding the previously provided performance guidance and market expectations. The company's revenue guidance for Q2 of FY2025 reached $28 billion, also greatly exceeding expectations, and Nvidia's stock price soared in the short term after the financial report was released.

Therefore, for Nvidia's latest fiscal quarter, we need to focus on the comparison between Nvidia's actual performance and performance guidance and Wall Street analysts' predictions to see if Nvidia can deliver a satisfactory performance to the market.

2. Datacenter revenue

Nvidia's datacenter business used to be the main growth driver, with its revenue accounting for only 37% in the first quarter of the 2021 fiscal year. In just three years, by the third quarter of the 2024 fiscal year, it reached a proportion of about 80.1%. With the continuous explosion of the AI industry, Nvidia, as a 'shovel seller', is expected to see even stronger growth in its datacenter business.

[2024.8] How to look at the performance of Nvidia? The key indicator to watch for short-term stock prices. -4

Starting from the fourth quarter of the 2023 fiscal year, Nvidia's datacenter revenue began to reverse the previous decline and returned to a growth trend in both year-on-year and quarter-on-quarter comparisons. In the following five fiscal quarters, driven by the demand for computing chips in large language models, recommendation engines, and generative AI applications training, Nvidia's datacenter revenue accelerated growth each quarter.

Nvidia's financial data for the first quarter of the 2025 fiscal year shows that its datacenter revenue was about $22.56 billion, a year-on-year increase of 427.2% and a quarter-on-quarter increase of 22.6%. It continues to be the main driving force for revenue growth, accounting for a historically high proportion of 86.6% in total revenue.

However, although Nvidia's datacenter revenue has shown amazing growth in the past few quarters, it is difficult to expect its revenue growth to continue to accelerate in the future. It can be foreseen that as the revenue base increases, its growth rate will likely gradually slow down in the next few quarters.

In fact, the quarter-on-quarter growth rate of Nvidia's datacenter revenue has already been slowing down in the previous two quarters, and its year-on-year growth rate will likely slow down significantly in the coming fiscal quarters. Therefore, in future performance, we can pay attention to whether the growth rate of its datacenter revenue can stabilize at a relatively high level after gradually slowing down.

3. Inventory situation

In addition to performance on the income statement, inventory levels are also very important indicators for industries with cyclical fluctuations such as the chip industry, which measure cyclical changes and growth expectations. When industry demand declines and oversupply occurs, the company's inventory levels will rise, resulting in increased sales pressure and stock price pressure. Conversely, when the cycle reverses and demand improves, the company's inventory levels will quickly decrease, and the sales outlook will improve.

For the change in inventory levels, a more suitable indicator is inventory/revenue. The larger this ratio, the higher the inventory level and the greater the sales pressure. For example, NVIDIA's inventory/revenue has been continuously rising since Q4 of fiscal year 2022, and its stock price has been declining from that time.

[2024.8] How to look at the performance of Nvidia? The key indicator to watch for short-term stock prices. -5

In the fiscal year Q1-Q4 of 2024-2025, NVIDIA continued to grow significantly, and inventory turnover also achieved significant results. Its inventory/revenue ratio decreased from 85.3% at the end of fiscal year 2023 to 22.5% in Q1 of fiscal year 2025, reaching a historically low level. In the future, we can continue to observe whether NVIDIA's inventory/revenue can continue to decline. If there is a significant rebound, caution may be required.

4. Profitability

In the process of continuous upward cycle, the improvement of NVIDIA's profitability is also one of the focus points in the market.

In terms of gross margin, in the past few fiscal quarters, as NVIDIA gradually emerged from the cyclical low, its gross margin has been climbing, reaching a high position of 76% in Q4 of fiscal year 2024. In Q1 of fiscal year 2025, due to the strong demand for in-period computing chips and NVIDIA's strong bargaining power, its gross margin further increased to 78.4%.

[2024.8] How to look at the performance of Nvidia? The key indicator to watch for short-term stock prices. -6

In terms of net profit margin, NVIDIA has also shown a rapid upward trend in the recent fiscal quarters. In Q4 of fiscal year 2024, it reached 55.6%, and in Q1 of fiscal year 2025, NVIDIA's net profit margin further increased rapidly, reaching a historical high of 57.1%. For the upcoming performance of Q2 of fiscal year 2025, we can continue to observe whether NVIDIA's net profit margin can remain at a historically high level.

Seeing this, you may have some new understanding of how to read NVIDIA's performance. It is worth mentioning that for many star companies, each release of their performance may mean a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors think that the bullish and bearish direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance release, then investors may consider the straddle strategy of buying call and put options to capture potential opportunities.

In summary:

During the continuous upward cycle, the performance elasticity of Nvidia is very high, and its performance results have a great impact on the short-term stock price. We need to focus on four key points.

First, compare the actual performance and performance guidance with expectations. The difference between expectations and facts will greatly affect the short-term stock price of Nvidia.

Second, the revenue situation of the data center. This business is of great importance to Nvidia, and we mainly focus on the speed of its growth.

Third, inventory levels. Observe whether Nvidia's inventory/revenue can be maintained at a lower level.

Fourth, profitability. Observe whether Nvidia's gross margin and net profit margin can continue to maintain a higher level.

Every time a company releases its business performance, it may bring potential trading opportunities. Investors can consider suitable trading varieties based on their personal risk tolerance.

[2024.8] How to look at the performance of Nvidia? The key indicator to watch for short-term stock prices. -7

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.

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