Nvidia Earnings Underwhelm Amid Global AI Build-Out
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. And today it's all about NVIDIA. After the close in New York, the company delivered a bullish forecast for revenue in the current quarter. This seemed to reassure the market that spending on artificial intelligence computing remains strong. Now heading into this report, analysts questioned whether supply constraints...

as well as a shift to the latest GPU design, Blackwell, would slow growth for NVIDIA. Blackwell, you see, is a more sophisticated GPU. It's had some manufacturing challenges. And then on the earnings call, CEO Jensen Wong gave an upbeat view on Blackwell. Blackwell is going to be incredible across the board. And when you have a data center that allows you to configure and use your data center efficiently,

based on are you doing more pre-training now, post-training now, or scaling out your inference,

Our architecture is fungible and easy to use in all of those different ways. Jensen Wong there, the CEO of NVIDIA. For a little more on the NVIDIA story, we turn to Angelo Zeno. Angelo is the Vice President of Equity Research at CFRA. Angelo, it's always a pleasure to have a chance to visit with you on NVIDIA Earnings Day. What did you make of the latest results?

we were actually pretty optimistic about the results so you know overall when we kind of think about um the actual numbers that were posted numbers implied or we saw a top line growth of about 78 percent and that was slightly better than expected the implied kind of uh

quarter number of revenue figure of forty three billion which is kind of what everybody was I was that April quarter guidance consensus was looking at forty two billion so they got it about a billion above the street again it implies a fairly kind of robust growth pace of north of sixty percent on a year of your basis.

And, you know, at the end of the day, I think kind of going into the numbers, there was some concern about the Blackwell ramp out there. And when you kind of look at maybe what the most important data point out there was that NVIDIA provided, it was the $11 billion in Blackwell revenue in the January quarter. We were looking for something closer to $7 to $9 billion. And that number is going to accelerate here over the next couple of quarters. And, you know,

That improved visibility, the easing of some of the supply constraints out there, I think eased some of the concerns that may have been out there for some NVIDIA investors. I think it's fair to say that one concern for the current quarter may have been gross margin. NVIDIA is predicting non-gap gross margin of around 71%. That seems pretty high, but it was less than forecast. Are you concerned at all about that figure?

Yeah, I mean, the gross margin number was probably the one black eye as far as where we kind of were looking at the guidance side of things. It was definitely a disappointment. I think when you kind of especially look at the trajectory of gross margins over the last couple of quarters, it kind of hit a peak run rate of about 78 percent in the first half of calendar 2024. So the margins continue to compress here going into the April quarter.

quarter. The good news is we do expect that to essentially be the trough of the cycle here in the April quarter. And then what we do expect is an improvement on the margin side of things. The company a couple of months ago did guide to the fact that as Blackwell ramps, you are going to see margin pressures. That's what you're seeing now. The company reiterated the fact that they expect mid

in 70s margins as we kind of go into second half of calendar 2025. And the fact that they did reiterate that, I think kind of is allowing some investors out there to at least look past some of the disappointment on the margin side of things. NVIDIA stock is still below the pre-DeepSeek level. And I'm wondering whether or not this has changed. The DeepSeek story I'm referring to has changed anything on the story with NVIDIA.

Well, you know, I think that's a good question. I think it's something that all investors kind of have a close eye on and we're kind of debating as we were kind of going into the print here. And as we expected, actually, Jensen was very bullish about the demand landscape in a post deep seek environment and essentially kind of talked about the belief for a lot of these kind of next generation reasoning models out there to require a lot more compute out there as much as 100 times the amount of compute that you're seeing now.

from these kind of reasoning models and essentially kind of his belief is this concept known as model distillation out there which is what deep seek is essentially leveraging and that's kind of basically taking a lot of the learnings from some of these larger language models out there and leveraging it in their own models and that requires again on Nvidia side of things until they've said it requires a lot more compute than just pre-training alone so they

They, again, talked up kind of a very positive story post-Deep Seek. It remains to be seen exactly how this all plays out. I will say this. As far as these large language models are concerned, you essentially have this kind of race to the bottom at this point in terms of pricing. A lot of China, new competitors out there, China competitors coming out there.

And that's going to kind of commoditize the large language model side of things. So that is going to have an impact in terms of AI monetization as far as large language models are concerned. And as a result of that, we think it's going to be more relevant for investors to start looking at the monetization from these AI agents out there and eventually as you move to a physical AI world. So I think this is an evolving landscape out there. I think stay tuned. But as far

As far as Jensen is concerned, post-Deep-Sea looks better at least long term for the compute, the evolution of compute. And then there's the geopolitics. I think we have to talk a little bit about what the Trump administration is intending to do. Recently, we learned that the administration is sketching out tougher versions of U.S. semiconductor curbs for China. Do you think that that necessarily will negatively impact NVIDIA and that narrative in a significant way?

If the Trump administration goes ahead and actually kind of implements, let's call it a more harsh stance on some of these kind of export restrictions, especially tied to GPUs, and I think kind of the fear out there is a potential all-out ban of these GPUs, and that would include, I guess, their most popular seller, which would be the H20 out in China. And if that were to happen, I mean, that potentially puts

puts at risk as much as 10% to 15% of their revenue, which is tied in...

China at least tied to kind of the data center side of things. So yeah, I mean, I think when you kind of think about the negative tilt or the kind of the bear case for Nvidia right now, the biggest near-term risk out there has to be the geopolitical landscape. So hopefully we get some kind of clarity on that here over the next couple of months. And hopefully the administration doesn't take that harsher stance out there.

To be honest with you, if the administration was really kind of looking to take a harsh stance on China as far as chips is concerned, we would say, hey, listen, do an all-out ban on the semi-equipped side of things, which would kind of be more...

of kind of a table pounder out there than kind of banding some of these GPUs. But it is very possible that we kind of get an all-out ban on these GPUs, and that would be the risk out there for investors of NVIDIA. These are early days for the adoption of artificial intelligence. But can you give me a sense, and maybe it's too soon to call it a super cycle, where are we right now in terms of the cycle for AI? And give me your assessment on how valuations kind of factor into that at the moment.

Yeah, I mean, I think you're right. I think this is early days and there's going to be a lot of volatility. I think, you know, there were some help out there from some investors that this was going to be kind of up and to the right. And that's not going to be how this all plays out. Right. In terms of the CapEx spend, in terms of the AI monetization of all of this, in terms of the cap.

as far as Nvidia's GPUs are concerned, we're entering kind of year three of this up cycle. It really kind of started with the OpenAI Microsoft partnership in early calendar 2023. So, comparisons are obviously gonna get a lot more difficult as the years go by. The question is how far is the current kind of CapEx cycle gonna go? Potentially could go five, six years, historically kind of CapEx cycles are going to be a little bit longer

on the data center side of things last longer than I would say on the consumer side of things when we're talking about, you know, kind of, you know, cycles tied to PCs or smartphones or something like that. But it's important, it's impossible to really kind of tell how this all plays out. Macro obviously has a big role in all of this as well. But then the

AI monetization is really kind of where all eyes should be for investors at this point in time. Take a look at Microsoft. Take a look at what a company like Salesforce is going to do, what they have to say over the next couple of quarters and years as far as AI monetization is concerned.

high is concerned, tied to AI agents out there. If we see kind of a strong ramp here going into the second half of calendar 25 into 26, that bodes well in terms of kind of the sentiment and enthusiasm in terms of some of the spend that we're seeing. If you don't see that AI monetization really kind of ramp up the way some out there are hoping for,

there's a very good possibility that some of these hyperscalers maybe kind of level off some of the spend as we go into 2026. As far as valuations are concerned across the AI ecosystem, they've definitely kind of compressed here over the last kind of nine to 12 months is kind of tech has kind of really been in this kind of

situation since the summer of last year. In fact if you kind of look at Nvidia's valuation trading about twenty five times on our calendar twenty six estimate it's come down significantly over the last couple of quarters. You can also see that you know across other type of markets

Mag 7 type names out there, whether it be a name like Microsoft trading about 26 times our calendar 26 estimate and others out there. They're actually trading at discounts to historical levels. So it kind of tells you that there are investors out there that are kind of getting a little bit skittish about kind of this AI trade at the moment. Yeah. Angelo, thank you so much for the analysis. Great stuff. Angelo Zeno there. He is vice president of equity research at

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. So we were talking about NVIDIA a moment ago. You know, the stock has been down this year on concern about the slowdown in spending potentially from data center operators. Also, we have to bring into the story the breakthrough from that Chinese startup DeepSeek. The company's chatbots show that LLMs can be developed on the cheap.

And that could reduce the need for NVIDIA's powerful AI chips. But for the moment, let's turn our attention to Chinese tech stocks. They've been on a tear lately. Joining us now is Shuli Ren, Bloomberg Opinion columnist. Shuli joins from our studios in Hong Kong. Shuli, it's always a pleasure. Thank you so much. How would you describe what's been happening with Chinese tech right now?

Well, deep-seek really has changed the perception of Chinese investors. They do feel, I mean, going back, like we know that Hong Kong, mostly Chinese companies, right? They are deep value traps. After Beijing's regulatory crackdowns on big tech and the whole property bubble burst,

like the Chinese shares are very cheap. But Deepsea basically said that, you know, China is not just a manufacturing powerhouse. It's also good with the software and digital stuff, right? Like Deepsea does generative AI. And the

People didn't really expect that a small, unknown startup, even to the Chinese until a month ago, could do so well despite all the export controls. And that really fired up. And then what we are seeing is that the tech stocks, the software companies, they are doing very, very well. And there is a sense that China can be a growth market again. In the latest column that you authored for Bloomberg Opinion, you write that

A Chinese alternative to the Magnificent Seven arrives. And I'm wondering whether you're really focused on a lot of these e-commerce names that we hear so much about, like Alibaba, Tencent.

Yes. One thing, though, is like a lot of it is about positioning, like global asset managers positioning. Coming into this year, everyone is overweight on basically the big seven tech stocks, right? The so-called the notion of U.S. exceptionalism. And everyone agrees that the U.S. stock market is overvalued because it's

just simply because so much money has been coming in. And there is this genuine need to diversify. And now the question is, where do you diversify to, right? Like China tech stock is one story. Another story is European stocks. They have been doing quite well as well. And there is expectation that Donald Trump, however you like it politically or not,

could propel peace over Ukraine, which means that it could be good for European economies, especially Germany. You know, Beijing seems to have kind of changed its attitude where some of the big tech stories in China are concerned. I'm thinking back to the meeting a few weeks ago that Xi Jinping had with some of the leaders of these big companies. And I'm thinking of Jack Ma in particular. Has Xi Jinping changed his attitude when it comes to big tech?

He has to because, believe it or not, just because China's economic outlook is not so good, right? Like the big tech, the big e-commerce platforms, political fortunes actually are improving because they actually soak up a lot of employment, right? Like young people, the unemployment rate for young people in China is very high. And if

young people have no jobs, they could become delivery workers, unfortunately. Or they could be Uber drivers. In China, that would be Didi. Or they could set up small e-commerce shops selling stuff. Or they could be influencers. And

I think Beijing does recognize that these big platforms, they are job creators, and they need to be nice to them. When you look at valuation, you're a financial analyst by training. What do you see when you look at some of these companies, Chinese firms that trade in Hong Kong?

Everything is relative. I mean, Tesla trades at over 100 times forward earnings. Xiaomi and the BYD, they both do EVs. They trade at roughly 40 and 25 times. And relatively speaking, everyone else is cheap compared to Tesla, right? And it's not just that.

A lot of Chinese feel that Elon Musk has been very distracted lately and then that he's not paying attention to Tesla's business. And that opens a window for Chinese EV makers. And in fact, like a lot of EV makers, they are adding like a lot of like advanced technology, for instance, auto driving, greeting the drivers with their favorite songs, et cetera, for free. Like basically you are getting the same car with technological add-ons.

but you're not paying a penny more. And they do feel that the likes of Xiaomi and BYD have a lot of space in Europe or even in the US. So I talked a moment ago about the rally that we have seen recently in a lot of these tech shares in Hong Kong. Do you know whether or not most of this buying is on the part of institutions or is it the retail crowd that is really stepping up and taking smaller positions? I think it's

But most of it is still Chinese money. You can actually see. So basically, mainland China and Hong Kong has a stock connect. Mainland investors can, through this stock connect, buy Hong Kong listed shares. And you do see that, you know, whenever the Hong Kong stock market is wobbling, like you actually see the southbound money coming into Hong Kong. So I do think like there is retail money, there is institutional money.

but most of it is still Chinese money. I mean, after all, like China has been a big career risk for a lot of global asset managers. They're interested, but they are still sitting on the sidelines. Although, you know, if you see like macro funds or hedge funds, they are in and out. They do trade. So how would you evaluate the conviction? Is there a feeling here that this is something more than a one-off, that there is really something more durable underneath the surface?

The last week or so, I have checked with a lot of asset managers. They feel quite bullish. And I do think DeepSeek is changing the game, right? Like going back to the whole thing, people have a lot of confidence in China's manufacturing power.

But they don't really have that much confidence in China's software power. And the deep sea shows otherwise. And that's why, like, if you see the Hong Kong listed tech stocks, they wobble a little bit when the news flow comes that Trump is going to increase export chip controls on China. But very quickly, you just see people buy on the dip because they just think export controls are not working.

Shuli, thank you so much for joining us. It's always a pleasure. Shuli Ren, she is Bloomberg Opinion columnist, joining us here on the Daybreak Asia podcast.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krisner, and this is Bloomberg.

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