Motley Fool Hidden Gems Investing - Nvidia’s “Burn the Ships” Moment

Episode Date: August 29, 2024

Why is the chip designer spending $50 billion on share buybacks? (00:21) Tim Beyers and Ricky Mulvey discuss: - Highlights from Nvidia’s earnings. - What future supercomputing systems could create. - CrowdStrike’s first call since its outage. Companies discussed: NVDA, CRWD, PANW, S Learn more about the Range Rover Sport at www.landroverusa.com Host: Ricky Mulvey Guest: Tim Beyers Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

The most important company on the planet reported. Let's get into it. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Tim Byers. Tim, I feel like you're on one today. How are you doing? What's going on? most important company on the planet you sure you want to go there six percent of the s&p 500 and it's basically been driving all of the returns not all of it but a significant majority of it a significant amount well you better name that company then nvidia they just reported they did if you look at financial media if you look at the financial media nvidia is the most important company on the planet right now i would not use the financial media as my barometer of what is

the most important company in the world but i will grant you that that is a fact i will also grant you that there was a i mean in the most the dumbest most hilarious thing i have seen so far in an earnings season is there was an nvidia watch party there was a watch party can we just take a moment to recognize that there was a watch party in new york city for a thing you can't watch for an earnings call now that and so what you end up watching apparently is like the cnbc on-screen reaction have we lost our collective minds kevin t dugan staff writer at the intelligencer went to the watch party i think they only existed in new york city when the earnings missed he said quote a man in a collarless celadon button down balked when i asked him his thoughts

about it looking as if i killed his dog others were far less attached quote i really don't know anything i barely care one said i just wanted to see what was happening with this meme event end quote tim what's your reaction barely care or do you look like i just killed your dog given the earnings report neither i mean i like neither like it's i am not attached to the nvidia results I think they're interesting. I think they were good. I don't think there was an earnings miss here. I think that the guidance wasn't what everybody would have hoped for, for a massive beat. But let's just be clear. Revenue up 122%, up 16% sequentially. Data center revenue up 154%. This is still an outstanding business. And even for the forecast, Ricky, for the Q3 forecast,

there is a significant deceleration in revenue growth down to 79%. But that's still 79% year over year that they are forecasting for Q3. So, I mean, come on. These are good results. But that is not the issue. It is not the issue. The issue is that – so, I should have – I got sucked in. So I didn't lead with my strongest statement.

So now I owe one to Matt Greer here. My strongest statement is this here, Ricky. NVIDIA just gave you its burn the ships moment. This is a burn the ships moment for NVIDIA where Jensen Wong has said unequivocally, these tailwinds in AI, this growth that we have been showing you is going to continue you for a long, long, long time. And the way I know that is because NVIDIA just agreed to do a not $10 billion, not $20 billion, not $30 billion, or even $40 billion, but a $50 billion stock buyback. What the hell is happening? They do not have $50 billion, Ricky.

They don't? Because this is a $3 trillion company. This seems like chump change, Tim. No, no, no. $50 billion is never chump change. And so, in terms of net cash, NVIDIA has about, what is it, $26 billion, a little more than $26 billion in excess cash, which is a lot. But now you're saying we need roughly double that in order to fund these buybacks. Now, during the quarter, NVIDIA will tell you, and they will be right, that they generated meaningful cash flow. And I will say, even if you strip out everything, all the debt repayments, all the stock-based comp, all the share repurchases, any cash acquisitions, and the capex, you still get $3.4 billion in free cash flow. So if you're to annualize that, you're to

looking at $13, $13, $13.5 billion in free cash flow. Clearly, they can fund it if they keep growing at this rate. If Jensen Huang is right, my point is, Ricky, is that he is telling you, he's not making any room for there to be a cresting wave. Like, hey, we're going to ride this for as long as we can because it ain't going to last forever. He is not saying that. Not only is he not saying that, he's going all gas, no brake and saying, this is going to keep going for way longer than you think it is. If you think this is going to slow down and hit a bump in the road, you are wrong. That is my interpretation of what Jensen Huang is saying here. Also, maybe Jensen Huang thinks the stock's undervalued. If they're putting that many

billions of dollars into stock buybacks. I'm getting a shrug emoji from Tim for those listening. That does not seem likely, but keep going. Let's get into some more of the actual business highlights. So this is really a data center business and data center revenue making up about 90% of total revenue, $26.3 billion on the quarter. Tim, that is up more than 150% year over year. And a lot of that is coming from inference, from ai systems doing inferencing you can think of this as drawing complete conclusions from data sets the simplest version of that is an email system guessing if a message coming to your inbox is spam another highlight that analysts were watching is that its new gpu blackwell is in a

sampling phase which some are taking is a shipping delay anything here really stand out to you i don't know that it's a shipping delay but again okay this is what here here's what colecress who is the cfo said during during the call she said blackwell production ramp meaning production meaning we're shipping shipping those chips out and the black blackwell is the newest most advanced of the ai chips that nvidia produces and in some ways this is what you would call a system on a chip a system on a chip is lots of components all the things that might typically be separated on like a motherboard, but they are baked into the chip. It's a system, system on a chip set. So Blackwell production ramp is scheduled to begin in the fourth quarter,

not third quarter that's coming, fourth quarter, and continue into fiscal year 2026. In Q4, we expect to get, and this is the key here. This is why I say it's burn the ships. We are setting expectations very high. We expect to get several billion dollars in Blackwell revenue. Really? Because you haven't sold anything yet. So you're going to get several billion, Ricky. We're not going to scale. We're going right to it. All gas, no break. I think that is interesting, possibly reckless, but let's give them credit because they keep delivering. So I'm not going to call it reckless. But again, regardless of what you think of the valuation. What NVIDIA is saying is that everything's great. The demand is really high

and it is not going away. And here's another example here. So they're sampling, but what they're saying is, don't worry about it. As soon as we hit Q4, we're going to have several billion dollars of new revenue coming in. I think there's sort of a... I want to bring to scope sort of the raw power of what they're building and jensen wong talking about the blackwell system basically making aggregate systems out of these chips that can process 259 terabytes per second the rough calculation i did tim got me to about 1400 hours of streaming 4k video per second or if you're doing uncompressed like blu-ray quality dvd that's 350 hours of uncompressed video per second that's a lot of processing power that's about to become available you like a reckless

prediction any uh any reckless predictions for what can come out of that much processing power well anything that is a an extremely hard processing problem so things like if you were to do things like advanced simulations that are required for things like, you know, aerodynamic design. I could see things like for even space travel, you know, like you're talking about that kind of the sorts of planetary simulations and astronomical, you know, simulations for those kinds of calculations, that's serious business. So that kind of compute highly useful in those situations. Another that would be a bit more common that I think would be really useful, I don't mean this in a political sense, but I know the president, the current

president, President Biden, wanted to do what's called a cancer moonshot. If you're going to do something like a cancer moonshot, where you want to deconstruct and try to solve cancer forever, That presumably is a very difficult mathematical computational problem where we're going to address therapies to solve cancer forever. You would think like something like that. So like in the biotech industry where you're doing just crazy simulations, you're working with a lot of data. Yeah, you could see that. But I would guess it's specialist use cases. The dark side of it is, and this is one of the things that worries people about quant computing, that when you're able to process an extraordinary amount of data at a much faster pace and much more accurately, that is how you crack secure systems.

Not great. Not great. Yeah, with quantum computing, I've heard, I think this was in Michio Kaku's book, where you'd essentially, to send secure data, you'd have to do it with like laser beams. because you'd have these quantum computers able to crack basically any code because they can just throw infinite data at it right like so that's that's the that's the dark side of it if you're able to process that much information when is encryption even when when does it even matter can you actually do digital encryption and get away with it or is anything that's digitally encrypted is essentially an open book because you have enough compute to unencrypt it let's let's

talk about the stock for a second. Stock is down about 4% on the earnings results. Oh, no. Still up on the month. The headlines I'm seeing, Tim, are NVIDIA tumbles after disappointing forecaster. NVIDIA pays price of lofty expectations. Shrug. Another shrug emoji. Right now, NVIDIA is trading about 40-ish times forward earnings. That's in line with AMD and kind of not historically out of line for the company. How lofty are the expectations for NVIDIA at this point from its investors? So there's two things that are true here. And I know I've said this many, many times. Financially, you could make an argument for the stock, and you just did it there on a forward earnings multiple. I could also say 32 times revenue is completely outrageous.

I could say that as well. But I think the other argument that I will make is that what NVIDIA is setting up for is an expectation of not just outrageous growth over the next couple of years. What NVIDIA is setting up for and the way that Jensen Wang is talking and their actions around $50 billion in stock buybacks is that this is a company that's going to grow at an accelerated pace for well beyond the next 10 years. So you have to decide, do you believe that? Do you believe that NVIDIA is a company for the next 20 to 30 years to be the company that provides the core engine of compute for the future? Because that's kind of the expectations that they themselves are setting. Financially, you can make an argument over the next couple of years, sure, take a small position. But are they going to fulfill what Jensen Wong is telling you? I think that is arguable. Now, I'll give you one last thought on this.

why would you set expectations that high? And I just want to give you a quote from Jensen Wong and tell you my interpretation of what this means, because it does explain, it answers your question here, Ricky. This is from Jensen Wong. The first person to the next plateau gets to introduce some revolutionary level of AI. The second person who gets there is incrementally better or about the same. And so the ability to systematically and consistently race to the next plateau and be the first one there is how you establish leadership. What Jensen Wong has told you there, in my opinion, this is my interpretation, Ricky, two things. The first is we got to be first. We have to be the pioneers. We want to set the pace.

This is our mark to lose. And the second is we know people are coming for us. there are people coming for us and so if we don't do that we're cooked he's not ever going to say that but that's my interpretation of it we're going to get to crowd strike earnings in just a second but first we're going to do a quick ad want to fast forward your career discover the chang school of continuing education at toronto metropolitan university our programs are the perfect way to boost your success. Visit the Chang School online today. All right, Tim, this is the first earnings call for CrowdStrike since the outage. Interesting moment for CEO George Kurtz, starting with an apology, a thanks to the cybersecurity

community laid out how CrowdStrike is changing its content release process. Before we dig into the earnings and before we dig into how that process is changing, what was your high-level reaction to CEO George Kurtz's response? I thought it was good. I thought there was some humility there. I thought there was some recognition of the damage that CrowdStrike had done. There were some moments where I thought he didn't take a victory lap, but he did equivocate it a little bit like he said for example and in some cases we responded like within minutes or things like that like don't say that nobody needs to know that we know that there were some moments that you did that what everybody remembers is the days of blue screens of death all over the world

so just don't don't do that so but other than that i thought he was more humble i thought that was good. And from a financial perspective, you could argue that this isn't so surprising that the quarter was pretty good because the outage came at the end of the quarter. But even the guidance for the quarters ahead honestly wasn't that bad. Their earnings per share guidance for the next quarter is way below what the street had forecast. I can't say that's too – that's not really unexpected, Ricky. And they did say that over the next two quarters, they expect roughly about $60 million in lower subscription revenue as they reformulate contracts and they make good on promises that they had to customers. They're just trying to make some

customers happy. So overall, I would say they did pretty good this quarter. But there's a caveat there that we can get to. And I'll leave you with this piece, and then we can follow up on it however you want to. It's good. But the way that CrowdStrike does business, where the enterprise sales cycle is so long, it could take a while. It could be well beyond two quarters from now that we really start to see the impact of this outage. Yeah. I think there's got to be some discussions happening between IT departments and C-suite executives. How about moving to a different vendor after this outage? That's going to take a while. One of CrowdStrike's main competitors is Palo Alto.

I mean, do you think Palo Alto is picking up a lot of business because of this? Do you think for existing CrowdStrike customers, this is talk but no action? What do you think is happening? I don't think there's going to be a lot of pickup for Palo Alto because Palo Alto in and of itself has a platform that is stitched together. And so I think they always have a bit of a hard sale, particularly against CrowdStrike. so i'm not sure that palo alto is the big benefactor here i will say that sentinel one which is a direct competitor that is trying to do a similar platform sale that has for years long before ai was the craze it is now they talked about an ai infused platform for endpoint protection

We use it here at The Fool. It's good. It's a good product. I had been bearish on Sentinel-1 for years, Ricky, because just the cost that they incurred to acquire a customer was so outrageous. It just looked like they were never going to catch CrowdStrike. So for me, it's going to be really interesting to see over the next four quarters, head to head, how do I compare what Sentinel-1 is doing versus how CrowdStrike is doing. If Sentinel-1 is materially lowering its cost to acquire per customer, while CrowdStrike is having a harder time keeping customers, that will be interesting. So I don't think it's Palo Alto. I do think Sentinel-1 is going to be one to watch. But I'm still not sold on Sentinel-1. I should be clear about that.

I mean, really, they have lit so much cash on fire, Ricky, that I really need to see them sober up before I'm genuinely going to get interested in Sentinel-1. So let's pretend for the sake of this discussion, you're a CrowdStrike customer. And you're hearing from George Kurtz, this is what's new. You're going to be able to basically choose when content is deployed, when you get an update. We're doing these quality assurance enhancements, including getting independent vendors to review the code before we send it out. And also, we're not going to roll out all of our new content all at once. So you don't have that widespread outage. Are you satisfied with that? part of me would be furious and and part of the reason for that is like you didn't give me fine grain control over how i was going to be able like and i think in this case let's be clear crowd strike isn't saying hey you get to defer not getting an update if you

don't want an update we're not going to give it to you they're not going to do that they're not going to be negligent. But what they will say is you get to choose. So let's use an example of where things happen. Let's take Delta for an example, where Delta had all of those blue screens of death at its customer agent terminals, which really screwed them completely. You could have Delta say, hey, look, we're going to turn on, we will not turn on a distribution of the CrowdStrike update to those agent terminals until we here at HQ push it to some other environment. We run a few more tests through it. So it doesn't push out to the entire network automatically. Delta says, oh, there's an update. Okay. We put it to this testing

environment first, then we'll test it. And then if it works for us, then we'll let it go out to the agent terminals. It's basically, they don't get to choose when the update comes. What they do is they get fine-grained control. And you'd have to imagine that there are some chief information security officers who are like, I'm furious that you didn't let me do this before because this was basic. And so, that is good. But you can imagine that just knowing that these were basic things would create a point of frustration. But overall, is it good that they're doing it? Yes, it is absolutely good that they're doing it. And by the way, they are not the only ones. Tim and I are going to talk about this on This Week in Tech tomorrow.

They are not the only ones that have to be involved in this conversation. So does Microsoft. And interestingly enough, I am glad that these two recognize that there will be a summit in Seattle on September 10th, where Microsoft is bringing in all of its partners that have that very low level access like CrowdStrike does to come in and say, let's talk about this so we don't take out 8.5 million Windows computers again. So it'll be CrowdStrike, Microsoft, presumably several others to kind of talk this through and come up with better processes. That's good for the industry. Last time you talked about CrowdStrike, I think it was with Mary. It might have been Dylan. Usually, those are not the hosts that people get confused on the show. Anyway, you were in sort of a wait and see spot with the stock. How about now? Any questions remaining? What's your vibe check on it? I'm still in a wait and see mode. But I will say that one of the things I was looking for

is good numbers around net new ARR. So that is new annual recurring revenue, essentially new contracted revenue coming through the door. And it was up to 218 million in the last quarter. That was up from the prior quarter of 212 million. So I need a full quarter of the post-outage CrowdStrike to see what that new net new ARR looks like. And I'll be very curious if they can keep roughly around the same level or not lose too much. I'll be very encouraged. I thought this was a decent quarter. It looks like they're moving in the right direction. It looks like they're taking steps to go in the right direction. I thought it was awesome for those who missed it i don't know what we would call i think it was like the pwned awards where

the chief what is it was it either the cfo or the chief product officer essentially it's like the tech industry the security industry's version of the razzies you know like okay the winners of the the most horrible movie gets the razzie and this was it like the biggest security failure and it went to CrowdStrike and CrowdStrike sent a senior executive to accept the award for like the most boneheaded, biggest security mistake. I thought that was a good sign too. So it does seem like they're moving in the right direction, but I'm a wait and see guy here. And Byers, appreciate you being here. Thank you for your time and your insight. Thanks Ricky.

As always, people on the program may have interests in the stocks they talk about And The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.