February 26, 2025

QuickTakes

The Digital Revolution

Marches On As Nvidia Beats

Artificial intelligence, and all the capital spending that comes along with it, is here to stay. Nvidia reported today that its sales last quarter rose 78% y/y to $39.3 billion, and management’s revenue guidance of $43.0 billion (+/- 2%) for the current quarter was above the consensus estimate of $41.8 billion. Moreover, the company laid out plans to get its new Blackwell chips to market in size, easing worries that there might be delays in production or sales.

Nvidia's share price was up in afterhours trading after rising 3.7% during the day. We expect it to continue rising over the rest of this year after plateauing for the past six months (chart).

The emergence of DeepSeek's lower-cost AI model in late January raised concerns that the Magnficent-7's huge expenditures on R&D, semiconductors, data centers, and energy would be scaled back. Rumors that Microsoft was cancelling a couple of data center leases spooked the markets earlier this week. We've opined that DeepSeek is not a threat and, if anything, is a bullish catalyst for AI demand and therefore overall AI spending. The incredible demand for Nvida's premier AI chips confirms our assessment.

Consider some other developments from Nvidia's earnings report and how they interplay with the economy and the rest of the stock market:

(1) Valuation. One major concern about Nvidia is that its earnings growth rate is slowing. Seemingly exponential revenues growth was supercharged by the soaring forward profit margin from a low of 35% in 2023 to 56% in 2024 (chart). Progress has stalled, and the margin is narrowing, if anything, ever so slightly. Nvidia guided a non-GAAP gross margin of 71% for the current quarter, just below the consensus estimate of 72%. The company has said the margin will widen again once new products like Blackwell reach the market. That certainly makes sense!

But if a slowdown in growth is a concern, it's already reflected in Nvidia's share price. The valuation multiple has declined from a peak of 50 times forward earnings in 2023 to a multiyear low of 29 times as of earlier this week (chart).

In the real GDP accounts, investment in information processing equipment dipped slightly in Q4 from Q3's record high, while R&D and software spending rose to record highs (chart). Meta, Microsoft, Amazon, and Google are expecting to spend a cumulative $325 billion in capital outlays this year, driven by a continued commitment to building out AI infrastructure. DeepSeek's achievement did not change their massive spending plans.

Markets sold off over the past week mostly because a number of consumer-related datapoints have been weaker than expected. We think that's a temporary soft patch. The Nasdaq Composite dipped below its 50-day moving average (dma) but remains above its 200-dma (chart). We're projecting that this index will remain in its upward channel, and we are targeting 22,000 for it by the end of this year.

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