Motley Fool Hidden Gems Investing - Nvidia’s Big Number

Episode Date: May 29, 2025

$24 billion of free cash flow in a single quarter is no small feat. If Nvidia can keep that pace, it may actually be trading at a reasonable price. (00:21) Tim Beyers and Mary Long discuss: - Market relief about the latest in Trump’s trade saga. - A rose and a thorn from Nvidia’s latest report. - Another trade-related announcement that affects the semiconductor supply chain. Companies discussed: NVDA, CDNS, SNPS, SIEGY Host: Mary Long Guest: Tim Beyers Engineer: Dan Boyd Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, "TMF") do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit megaphone.fm/adchoices

When NVIDIA speaks, the world listens. Unless, of course, there's something else to pay attention to. You're listening to Motley Fool Money. I'm Mary Long, joined today by Mr. Tim Byers. Tim Byers, joining us on Motley Fool Money twice in one week. Thanks for being here, Tim? I mean, thank God I'm fully caffeinated and ready to go. That's too many times. Gotta have something to keep you going. Luckily, we don't have any shortage of things to talk about today. Of course, we've got earnings from NVIDIA, which dropped its results yesterday after the bell. Typically, the morning after NVIDIA drops results, we clear the show. We spend the whole time talking about that. Today, though, another story kind of seems to be stealing some

of NVIDIA's spotlight because the U.S. Court of International Trade, which is made up of three judges in Manhattan, ruled that Trump's tariffs are effectively illegal. Tariffs having been the big story of the past, God, I feel like time is, we're in a bit of a time warp. I don't even know how long it's been, but at least since early April, tariffs having taken up most of the news since then, this is obviously a pretty big deal. So Trump's tariffs were issued on the basis of this 1977 law that allows the executive branch to implement commerce controls in the case of a national emergency, Trump had said, hey, the trade deficits that the U.S. has, that constitutes a national emergency. Now this court says no dice. So this is, again, yet another chapter in this

will we, won't we, up and down, back and forth tariff saga that's been going on since Liberation Day. Neither of us are legal experts, Tim, but you are a stock expert. So what in the world does this latest tariff change mean for investors? Oh, this answer is going to be so snarky. So snarkiness alert, because the only real answer here is that it changes nothing until it changes something. That's a terrible, trite answer. But what I mean is that we have to have a ruling, and this ruling will be challenged. The short-term impact, I should say, is probably be a delay in implementing some tariffs and that's likely to be very good for uh some importers certainly uh but we need to know you know will countries on the other side of these reciprocal tariffs that were

announced on liberation day are you know just because we've deemed them illegal for now will they pause their own tariffs is the so-called deal that is coming with the eu is that is there still something to be done there? We do. I mean, we really just do not know. This is a line in the sand. I am certain that the president is not very happy about it. And we'll fight this. And so we'll find out. What I think we're seeing in the market, though, just to put this in investing terms, Mary, sometimes we have these things called a relief rally. This feels like a relief rally, like oh man the tariffs were not good for a number of companies there were a number of companies that were manufacturing for example in vietnam like if this means that the vietnamese market is back

open for manufacturing fan freaking tastic like that is the definition of a relief rally so you know hey baby we just with this is awesome we have ourselves uh you know a big summer moment we all jump in the pool and have fun, but we don't know that that's going to be the case yet. So expect court challenges, expect legal experts to weigh in, and then we'll see what's real. So despite continued uncertainty, the market is up a bit on this news, seeing a bit of this relief rally that you mentioned. Market's also being lifted by NVIDIA. So, okay, let's talk NVIDIA. Tim, you and I were at Venture Access co-working space yesterday afternoon, and we got to talking a bit about those results then. Of particular interest to you yesterday was the

company's free cash flow. NVIDIA posted $24 billion in free cash flow this quarter. That is obviously a very big number, but the thing about NVIDIA is they're always dealing in big numbers. This is a company that's used to triple-digit revenue growth. Why is this big number catching your eye? Well, consider what it would mean if NVIDIA can keep the pace we've seen here at $24 billion a quarter, the company would be on track to deliver 96 billion in organic free cash flow this fiscal year. That's close to a 3% forward free cash flow yield. And to put that in context, Mary, the market average, the average for the S&P 500 is 3.3%. So if we take that as real, you could make the argument that NVIDIA is trading pretty reasonably. I have not made

that argument, by the way. But if you wanted to make that argument, you could. If there's enough evidence that $96 billion in current year FCF is actually achievable, I recognize that's a big if. It requires growth to continue at the kind of pace we're seeing. And just for context, the data center business, which is driving all the results at NVIDIA right now, data center revenue was up, I believe it was 73% year over year. So you need to see very high growth rates. But let's say it's real. Because the context here, Mary, is that according to S&P Global Market Intelligence, our friends at Capital IQ, the average consensus estimate for free cash flow for this fiscal year is $103 billion. $96 billion is underselling it. That is insane. So it is

possible that these are not Pollyanna estimates. If that's true, this might be a very good year to be an NVIDIA shareholder. So you're very impressed by the free cash flow. But as we were talking before we started recording, you mentioned that you've got a gripe with something else within the NVIDIA results. What might that gripe be, Mr. Byers? I just don't understand why NVIDIA pays a dividend. I think we just have to stop. You just have to say like, look, I know it's a one cent per quarter dividend. We're not even going to pretend that we can't. It's the thing that you do that you only do it because somebody sometime at some point said like, yeah, you should do that. You're like, but I don't want to do that. I really hate doing that. That's what

like like it's like they're begrudging paying a dividend then don't do it don't do it like it's only one cent a quarter and i find this like if you are paying let's put it this way mary like at some point you just shouldn't be allowed to say you pay a dividend if your dividend yield is 0.03%. That's not a dividend. I mean, that's just insane. So look, you either pay one and investors can look forward to it and they can take that capital and reinvest it how they want to maximize their returns, or you do the other thing you do. If you care about shareholder returns. You reinvest the money back into your business and you grow faster in order to deliver returns for shareholders that way. But I just find it, it is utter nonsense, Mary. It's so outrageous.

And they just, just please, please stop. Just please stop. Either do it for real or stop. This family is on the brink of civil war. On September 18th, Mobland, the hit original series is back on paramount plus we are the harrigans don't know the net and google us from the underworld of guy ritchie do you want to step up the ladder i want karma dead starring tom hardy pierce brosnan and helen mirren do i have to do everything myself mobland new season hits september 18th on paramount plus not too long ago nvidia stock dropped on the news that it would no longer be able to sell what what's referred to as h20 chips so the to china so these h20 chips were specially made to comply with u.s export controls to china

then the trump administration made changes to those export controls and bippity boppity boop it became illegal for nvidia to sell those special chips to china the company incurred a four and a half billion dollar charge from excess h2o inventory this past quarter and it warned that it expects to lose about eight billion dollars in the second quarter revenue as well tim i whenever i hear about this story i cannot get the image out of my head of just a pile of chips that that took up so much time and energy and material and brain power to build just sitting in a pile and something about that image makes me so sad. Am I putting too much weight in this? Is there really nobody in the whole world that wants to buy these chips? Maybe not. I'm not so sure that's a bad

thing. I mean, these chips were effectively optimized for the Chinese market. So why would they be useful somewhere else? I mean, NVIDIA needs to ensure that it builds according to what its customers need. And if that means creating chips that can't easily transfer from one market to another, then so be it. It's not like there isn't enough global demand for what NVIDIA offers, Mary. I mean, go back to that cash flow number that we were talking through. They are doing just fine. And look at it this way, with the write-down in place and the expectations of write-downs to come in place, if NVIDIA finds even a tiny sliver of a fraction of those chips being sold somewhere else or maybe refactored to fit in a slightly different market

and not all of them are sold. Maybe it's like $500 million. Well, that's $500 million nobody was counting on. And so I think it's probably immaterial at this point. But then if they do find a way to capture some value from what we thought was 12 and a half billion of lost value will then look out you know that will be a nice little catalyst immaterial perhaps but interestingly jensen huang really seems to be to be bothered by it he's bothered by it for sure last week he called u.s chip export controls a failure granted of course like okay huang himself has admitted that the biggest impact of a lot of these restrictions that we've seen have been the erosion of NVIDIA's competitive position. Another Huang quote from this most recent

earnings call is that China is one of the world's largest AI markets and a springboard to AI success. I want to double click on that with you, Tim. China is important to AI, if you ask Jensen Huang. How important is China to NVIDIA? These H20 chips aside. Well, I mean, it's fast growing. The worry from Jensen, and I think he's right to express it this way, is it's one of the markets where consumption of AI infrastructure is likely to continue at a very brisk pace. So it's a fast growing territory. But in terms of pure numbers right now, it's the fourth largest geographical revenue contributor for NVIDIA in fiscal 2025. And that was behind the U.S., Singapore, and Taiwan. China would argue that you should include Taiwan in your calculation of Chinese revenue.

So that's because they don't recognize that Taiwan is not part of China. But I would say it's the potential growth rates, and NVIDIA doesn't want to miss out on that. So is it important? Yes, it is important. Now, to be fair, we are dealing with a court challenge to come about what's going to happen with tariffs. It's not the same thing as export controls, but if we start to loosen restrictions, will that have an impact here? I don't know. But it's an important market, but it's not the end-all, be-all market. Let's be clear. The U.S. is far and away still the biggest market for NVIDIA.

Yeah, so I want to take a beat to kind of tie together the latest on tariffs in this court challenge that we're seeing there with the latest from NVIDIA. So importantly, shortly before NVIDIA's earnings, news broke about a new Trump administration announcement from the Commerce Department. And this announcement orders a number of companies to stop shipping goods to China, even if they'd previously been permitted to do so. So this largely falls in the realm of chips. This report basically says, if you don't have a license to sell chip software to China, you cannot sell to China. And if you do have a license, it's now under review. So at the heart of this announcement are three companies, Cadence Design Systems, Synopsys, and another that's a subsidiary of Siemens. So these companies are center stage because

they're the top makers of electronic design automation software or EDA software. Let's start by kind of connecting these dots. What is EDA software and why does the Trump administration not want China to have it? Yeah. So you define what it is. So it's design software. Essentially, it's the tooling you use to create chip designs that are then brought to life in manufacturing. But it's bigger than that. EDA is critical in that it allows for the testing and verification of a chip or a series of chipsets in the design phase. So what you're doing is you are generating designs. You are running those designs through paces because what you don't want, and you can imagine this because chip manufacturing is so sensitive and so expensive, Mary, that if you were

to run a bunch of chips through manufacturing you were able to you know you imprinted circuits on wafers and then you were done and then you had a run and you had chips that were failing straight off the line by the way failure rates in wafers used to be much much higher like it would be you and it used to be measured it probably still is measured this way it's i'm i'm not as up to date on my chip manufacturing lingo but we used to call them yields and so the yield on the wafer was so important like you didn't want to have you know you're you had a bunch of chips that were manufactured under this wafer and if you had like a 70 yield for example 30 of the chips on that wafer would have failed you don't want yields that high you would like the yields to be much

much better than that um and so eda is a way to not only design automate your designs automate your tests but test and verify in that design phase so you have a very high level of assurance before you go to taiwan send me and say all right let's go let's let's get into production um now the second question you have here is why doesn't the trump administration want china to have it I'm guessing, but I would say that the administration isn't so keen on cadence and synopsis, providing tools to Chinese chip designers, manufacturers, because they want to make it as difficult as possible to reliably replicate high-performance chipsets. They don't want to make it easy for China to compete in the AI, essentially the AI Cold War, the war for

technical supremacy in AI. And cadence and synopsis, by virtue of the tooling that they provide, are a critical part of the value chain here of developing very high-performance chips. Very likely, as a byproduct of all this trade and tariff talk and the back and forth there, But Jensen noted on NVIDIA's earnings call that he expects NVIDIA to build everything from chips to supercomputers in the U.S. by the end of the year. That's very likely music to Trump's ears. And unsurprisingly, it sets the company up well to avoid problems with the current administration in the future. But the end of year is fast approaching, Tim. And so what would this process actually look like?

how much manufacturing does NVIDIA currently do here versus overseas? Is the end of the year a legitimate timeline to move everything over here? How many times have you said something that you know when you're talking like this person really wants to hear this and I'm going to tell them what they want to hear? You and I have both done that, Mary. I know you have because I know I've done it. I know I've done it. Jensen Wong is telling the administration what they want to hear. This is hype, I would say. Now, will there be truth to it? I would expect that there will be agreements to manufacture chips at onshore facilities being stood up, particularly by Taiwan Semiconductor. I'm certain that's true. So I think for sure he's telling at minimum a

half-truth and probably a truth in context. But will there be actual production? I would say no, not much production, if any production. Now, to be fair, I think it would be super interesting for NVIDIA to pen a number of good agreements, including an agreement with Intel, because Intel is making real investments in its foundry business, and it needs signature customers. So, if there's a deal to be had there, I am very certain that Li Butan over at Intel would love to talk to Jensen and have a real conversation about how they could handle significant portions of NVIDIA's production needs right here on U.S. shores. But how much of this is going to be done by year-end? No, come on. I appreciate Jensen is playing the game, but

he's playing the game. Did I catch a reckless prediction from you just now, Tim? Is that what that was? Probably. That's probably a reckless prediction, yeah. Probably. Well, then that's a good place to end it. Tim Byers, thanks so much for the time, for helping to demystify so much of the uncertainty and to dig into NVIDIA's earnings with us this morning. Thanks, Mary. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. Advertisements are sponsored content and

provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. From The Motley Fool Money team, I'm Mary Long. Thanks for listening. We'll see you tomorrow.