Motley Fool Money - 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

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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? 6% 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 earning 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 or 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 colorless 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? I mean, 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. Like, revenue up 122% up 16% sequentially, right? Data center revenue up 154%.

Like, this is. still an outstanding business. And even for the forecast, Ricky, like for the Q3 forecast, there is a significant deceleration in revenue growth down to 79%. But that's still 79%, like year over year that they are forecasting for Q3. So, I mean, come on. Like, these are, these are good results. But that is not the issue. It is not the issue. 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 ship's 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 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 dollar stock buyback. What the hell is happening?

They do not have 50 billion dollars, Ricky. They don't because this is a three trillion. dollar 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 looking at, you know, $13, $13.13 and a half billion in free cash flow.

So clearly they can fund it. they keep growing at this rate. And if Jensen Wong is right, my point is, Ricky, is that he is telling you, he's not making any room for there to be like 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 break, 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 Wong 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 is, that does not seem likely, but keep going. Let's get into some more, the actual business highlights. So this is really a date. This is really a date. 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 conclusions from datasets. 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 it. its new GPU, Blackwell, is in a sampling phase, which summer taking is a shipping delay.

Anything here really stand out to you? I don't know that it's a shipping delay. But again, this is what here's what Colette Cress, who is the CFO said during the call. She said, Blackwell production ramp, meaning production meaning we're shipping those chips out. And the Blackwell is the newest, most advanced of the AI chips that Invidia. 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 the third quarter that's coming, fourth quarter, and continue into fiscal year 2026. And Q4 we expect to get, and this is the key here. This is why I say it's burning 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. 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 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 1,400 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 reckless predictions for what can come out of that much processing power? Well, anything that is an extremely hard processing problem. So things like if you were to do things like advanced simulations that, are required for things like 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 simulations for those kinds of calculations. That's serious business. So that kind of compute would be 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 round 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 Michi Okaku'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. So that's that's the dark side of it. If you're

able to process that much information, when is encryption even, 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 unencrypted. 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, or invadia tumbles after disappointing forecaster. Nvidia pays price of lofty expectations. Shrug, another shrug emoji. Right now, Nvidia's 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 the long term, 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 Wong 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 20,000?

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, eh, you know, sure, you know, 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. If you're early in your career and looking for insight, inspiration, and honest advice, Listen to the Capital Ideas podcast hear from Capital Group professionals

about leaning into the differences that make you unique, making decisions that last, and what it means to lead with purpose. The Capital Ideas Podcast from Capital Group, available wherever you listen, published by Capital Client Group, Inc. 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 the Crowdstrike had done. There were some moments where I thought

he didn't take a victory lap, but he did equivocate a little bit. Like he said, for example, And in some cases, we responded, like, within minutes or things like that. 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 do that. 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. You know, like their earnings per share guidance for the next quarter is way below what the street had forecast. I can't say that's too, you know, 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 kind of 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 is a caveat there that we can. get to, and I'll leave it, 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, you know, they're, how about moving to a different vendor after this outage? That's going to take a while.

Yeah. 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's happening? I don't think there's going to be a lot a 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 crazy.

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 crowd strike. So for me, it's going to be really interesting to see over the next like four quarters head to head, how do I compare what Sentinel One's doing versus how CrowdStrike is doing? If Sentinel One 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 One is going to be one to watch. But I'm still not sold on Sentinel One. I should be

clear about that. I mean, really, they have lit so much cash on fire, Ricky, that like, 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 crowd strike 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 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, Crowdstrike 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, or Delta had like all of those blue screens of death at its customer agent terminals, which like 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 80s. agent terminals. It's basically they don't get to choose when the update comes. What they do is they get fine grain 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're 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, you know, 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, you know, 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 crowd strike 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 Poned 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 the winners of the most horrible movie gets the RASI 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 phone headed 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. I'm buyers. 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.