Nvidia will report on Q3 tomorrow after the market close.

Let’s revisit a couple of observations from my August note, just following the Nvidia Q2 earnings.

First, we knew going in that the tech giants were buying as many Nvidia GPUs as Nvidia would sell them.  The price was continuing to go up, and they were all willing to spend whatever it took (which still applies).

With that, we had a good idea that demand in the quarter for Nvidia would be strong.

Indeed, it was another triple-digit year-over-year growth quarter – the fifth consecutive one.  And they made a lot of money.  The net income of nearly $17 billion in the quarter was more than the full year revenue of just three years ago.

But we also observed these two things in that Q2 report:

1) the valuation dynamic for Nvidia had changed,

2) And supply constraints seemed to have capped Nvidia’s growth capacity.

On valuation, as the revenues have exploded higher since early last year, so has the profitability of each dollar of revenue.  Operating margins have nearly tripled.

And with that, even though the price of Nvidia shares have skyrocketed over the period, the share price relative to its earnings power got cheaper along the way (i.e. the earnings growth outpaced even the torrid share price growth).

We can see it in the chart below.  When Jensen Huang shocked the world in May of 2023, declaring the “beginning of a major technology era,” Nvidia was trading 77 times the run-rate EPS at the end of that reporting quarter (Q1 2023 EPS times 4).

And for the reasons we just discussed above, this PE metric declined over the subsequent quarters (the stock got cheaper), even though the share price was soaring.

As you can also see, this dynamic started reversing several quarters ago, and even if they beat estimates tomorrow by a similar margin to previous quarters, the stock will be trading somewhere around 44 times this forward EPS metric.  It’s no longer cheap.  

That’s because profit margins are no longer growing, yet the stock price, particularly after the stock split announcement this past May, has been on a tear, outpacing earnings growth.

And this brings us to the second point we observed in the report last quarter, “growth constraints” …

It doesn’t appear that Nvidia will be a triple-digit revenue grower much longer, because of this …

If we look at the trend in the quarterly-change-in-revenues, Nvidia seems to be on a rhythm of consistently adding $4 billion a quarter in new revenue.  

We already know demand is insatiable, so both the rapidly advancing technology in accelerated computing and supply constraints seem to have capped Nvidia’s growth capacity (at least at this point). 

If this trend of $4 billion a quarter of additional revenue continues, Nvidia will be growing at a year-over-year rate closer to 50% by the middle of next year (no longer triple-digits).