Nvidia: Deepseek, piercing through Jensen Huang's "leather jacket"?

NVIDIA (NVDA.O) released its Q4 fiscal year 2025 financial report (ending January 2024) after U.S. stock market hours on February 27, Beijing time, with the following details:

1. Overall Performance: Revenue maintains high growth, gross margin continues to decline. In this quarter, $NVIDIA(NVDA.US) achieved revenue of $39.3 billion, a year-on-year increase of 77.9%. The company's revenue growth was mainly driven by demand in the data center business and increased shipments of Blackwell. This quarter, NVIDIA achieved a gross margin (GAAP) of 73%, below market expectations (73.4%). The company's gross margin was affected by factors such as the ramp-up of Blackwell production. Net profit for this quarter was $22.1 billion, a year-on-year increase of 79.8%, setting a new record for profits.

2. Core Business Situation: Data center is the largest contributor to performance, revenue share rises to 90%.

1) Game business declined by 11% year-on-year this quarter. Although there was a double-digit decline this quarter, it was still much better than AMD (which saw a year-on-year decline of 58.8%). Dolphin Research believes that the decline in the company's game business this quarter was partly influenced by the upcoming launch of the RTX50 new products. After the new products are launched, it is expected to drive a recovery in the company's game business;

2) Data center business grew by 93.3% year-on-year this quarter, mainly driven by demand for large models, recommendation engines, and generative AI. The growth of the business benefited from increased capital expenditures from cloud service providers. This quarter, Blackwell contributed $11 billion, providing a significant increment to the company's data center business.

3. Key Financial Indicators: Significant increase in new product inventory, expense ratio steadily declines. NVIDIA's operating expense ratio continued to decline to 11.9% this quarter, with revenue growth offsetting the increase in expenses. The company's inventory significantly increased to $10.1 billion this quarter, mainly due to the inventory buildup of Blackwell products, but the current inventory ratio remains relatively low.

4. Guidance for Next Quarter: NVIDIA expects Q1 fiscal year 2026 revenue of $43 billion (plus or minus 2%), a year-on-year increase of 65.1%, slightly better than Bloomberg's consensus estimate of $42.2 billion; Q1 gross margin of 70.6% (plus or minus 0.5%), lower than Bloomberg's consensus estimate of 72.3%.

Dolphin Research's Overall View: Financial report data is average, guidance expectations are fair.NVIDIA's financial report for this quarter is mediocre, as revenue could not maintain the previous beat guidance of "+$2 billion," and the gross margin is slightly below market expectations. Although Blackwell provided incremental revenue this quarter, the ramp-up of GB200 affected further revenue growth and gross margin performance.

Compared to the financial report data, the guidance for the next quarter is acceptable. The company expects revenue of $43 billion for the next quarter, which is better than the lowered buy-side expectation (around $42 billion). However, due to the ramp-up of Blackwell's mass production, the company's gross margin is expected to further decline to 70.6% next quarter and will continue to be under pressure in the first half of fiscal year 2026.

For NVIDIA, the market is most concerned about the following aspects:

1) Progress of Blackwell: This quarter, Blackwell achieved revenue of $11 billion. Although the ramp-up of GB200 is slow, the increase in shipments of B200 products supported the revenue of the Blackwell series. The company will soon launch the Blackwell Ultra series products, currently in a product transition phase, while the real product cycle of Blackwell will mainly focus on the second half of fiscal year 2026;

2) Impact of Deepseek: The low-cost strategy of Deepseek has emerged, which has somewhat affected market expectations for NVIDIA and the computing power industry chain. Although the current H series products also have good cost performance, better hardware performance can still drive growth. Since 90% of AI developers and companies globally use CUDA, it will be easier to use various mainstream tools. The combination of NVIDIA graphics cards and CUDA will achieve better efficiency and is a relatively preferred solution.

However, it should be noted that the economics of Deepseek will drive explosive landing of application scenarios, but new demand will focus more on inference computing power needs. Unlike the absolute monopoly of training computing power, users will have more choices in inference computing power.

NVIDIA's valuation premium consists of two parts: the industry's high beta and the high barriers to entry of its business.

Deepseek will bring higher growth in industry computing power demand, but it may affect NVIDIA's moat expectations.

3) Capital expenditure of major companies: From the recent data of major companies, the total capital expenditure of global core cloud service giants (Meta, Google, Microsoft, and Amazon) remains at a high growth rate. The total capital expenditure for the fourth quarter of 2024 reached $79.57 billion this quarter, a year-on-year increase of 81.6%, with different degrees of upward adjustments to the capital expenditure plans for 2025.

Overall, Dolphin Research believes that NVIDIA's financial report this quarter is relatively average, but the revenue from Blackwell and the guidance for next quarter are acceptable, although the company did not provide more highlights. Since cloud service giants are the company's largest buyers, although there are still good capital expenditure expectations, it is necessary to continue to pay attention to specific changes in the future.As the company will launch new products in the second half of the 2026 fiscal year, this will also be a key focus for cloud service giants' procurement, with capital expenditure expectations generally showing a trend of "lower in the front, higher in the back." Therefore, the current period is still a transition phase for the company's products, and the progress of the next-generation Blackwell Ultra will be the main focus of the market during this time.

Currently, the market is more concerned with Nvidia's growth expectations for the calendar year 2026 and the demand boost for H20 orders from Deepseek. The minutes of the conference call will be released by Dolphin Research on the Changqiao App later, and it is recommended to pay close attention.

For Dolphin Research's specific analysis of Nvidia's financial report, see below:

1. Nvidia's Business Situation

With the growth of Nvidia's data center, it has now become the largest revenue source for the company, accounting for 90%. Although the gaming business is also growing, its share has been squeezed to below 10%.

In terms of specific business:

1) Data Center Business: This is currently the main focus, with key products including H100, A100, Blackwell, and other computing chips. The company's core customers are major cloud service providers such as Amazon, Microsoft, and Google;

2) Gaming Business: The company remains a leader in the discrete graphics market, with the main product being the RTX40 series, primarily serving gamers and PC manufacturers;

3) Professional Visualization and Automotive Business: Both businesses currently have a small share, around 1-2%. The main customers for the professional visualization business include Pixar and Disney. The automotive business mainly focuses on Orin and Thor chips, with customers primarily being BYD, XPeng, and Li Auto.

2. Core Performance Indicators

2.1 Revenue: In the fourth quarter of the 2025 fiscal year, Nvidia achieved revenue of $39.33 billion, a year-on-year increase of 77.9%. The company's revenue continued to rise this quarter, mainly driven by the high growth of downstream data center business.

Looking ahead to the first quarter of the 2026 fiscal year, the company's revenue is expected to continue to grow. Nvidia expects first-quarter revenue of $43 billion (plus or minus 2%), a year-on-year increase of 65.1%, better than Bloomberg's consensus expectation of $42.2 billion, with revenue growth mainly driven by increased shipments of Blackwell products in the data center business. Previously, due to the slow ramp-up of GB200, mainstream market buyers had lowered their expectations for the next quarter to around $42 billion, and this guidance is slightly better than market expectations.

2.2 Gross Margin (GAAP): In the fourth quarter of the 2025 fiscal year, Nvidia achieved a gross margin (GAAP) of 73%, slightly lower than Bloomberg's consensus expectation (73.4%)The company's current gross margin is mainly affected by the data center business, and this quarter's ramp-up of Blackwell mass production directly impacted the company's gross margin.

The company previously believed that "the medium to long-term gross margin of Blackwell products will still reach around 75%." Therefore, as the mass production of Blackwell accelerates, the overall gross margin of the company is also expected to rise again. However, during the current capacity ramp-up process, the gross margin will be affected to some extent.

NVIDIA's gross margin expectation for the first quarter of fiscal year 2026 is 70.6% (plus or minus 0.5%), lower than Bloomberg's consensus expectation (72.3%). Driven by demand from AI and other sectors, the company's gross margin center has increased from 65% to over 70%. The recent decline in the company's gross margin is influenced by the ramp-up of new Blackwell products. As mass production speeds up, the company's gross margin is expected to rebound.

2.3 Operational Indicators

1) Inventory/Revenue: The ratio this quarter is 26%, an increase from the previous quarter. The company's inventory significantly increased to $10.08 billion this quarter, mainly due to the stocking of Blackwell products. The increase in inventory has somewhat affected the company's gross margin. Since the company's revenue is still growing rapidly, the proportion of inventory remains relatively low.

2) Accounts Receivable/Revenue: The ratio this quarter is 59%, showing an increase. Although the company's accounts receivable continue to rise, it remains at a relatively low level due to the high growth in revenue.

3. Core Business Progress

Driven by demand from AI and other sectors, the share of NVIDIA's data center business in the company's revenue continued to expand in the fourth quarter of fiscal year 2025, reaching 90.5% this quarter. The share of the gaming business has been squeezed to below 10%, making the data center business the most important factor affecting the company's performance.

3.1 Data Center Business: In the fourth quarter of fiscal year 2025, NVIDIA's data center business achieved revenue of $35.58 billion, a year-on-year increase of 93.3%. The data center business is the market's biggest focus, and this quarter's growth was mainly driven by the increase in shipments of Blackwell products and H200, primarily used for training and inference of large language models, recommendation engines, and generative AI applications. The year-on-year growth of the company's data center this quarter was driven by demand from the computing sideSegmented view: The company's data center business computing revenue was $32.6 billion, a year-on-year increase of 116%; network revenue was $3 billion, a year-on-year decrease of 9%. The company is transitioning from the small NVLink 8 with Infiniband to the large NVLink 72 with Spectrum X.

Blackwell brought in $11 billion in revenue this quarter, providing a significant increment to the growth of the data center business this quarter. Although the GB200 ramp-up is slow, the B200 has somewhat compensated for the impact of the GB200.

The current main focus of the market is: the progress of Blackwell Ultra and its contribution to the performance in the second half of the fiscal year 2026. Before that, urgent orders for products like H20 have also somewhat compensated for the company's performance.

As cloud service providers currently account for about 50% of the company's data center revenue, capital expenditures in cloud services have a direct impact on the company's data center business. From the capital expenditures of the four giants: Meta, Google, Microsoft, and Amazon, the total capital expenditure of the four companies reached $79.57 billion this quarter, a year-on-year increase of 81.6%. Considering the company's data center business year-on-year growth rate of 77.9%, the growth rates of both are relatively close, and NVIDIA's share in the capital expenditures of the giants is stabilizing. The continuous increase in capital expenditures from the giants provides assurance for the growth of the company's data center business.

After the emergence of Deepseek's low-cost strategy, the market has expressed concerns about the capital expenditures of major server manufacturers. However, from recent communications with core manufacturers, the four core manufacturers have still adjusted their capital expenditures for 2025 upwards by varying degrees, providing support for the company and the AI industry chain.

Due to the slow ramp-up of NVIDIA's GB200 mass production, downstream customers will mainly turn to procure Blackwell Ultra. Overall capital expenditures will show a "low at the front and high at the back" trend. Although urgent orders for products like H20 have somewhat compensated for the performance in the first half of the year, the company's true product cycle in the Blackwell series will still focus on the progress of Blackwell Ultra in the second half of the fiscal year 2026.

3.2 Gaming business: In the fourth quarter of fiscal year 2025, NVIDIA's gaming business achieved revenue of $2.54 billion, a year-on-year decline of 11.2%. This is mainly due to the limited supply of Blackwell and Ada GPUs this quarterIn light of AMD's performance, Dolphin Research believes that NVIDIA has clearly gained more market share this quarter. AMD's gaming business declined by 58.8% year-on-year this quarter, totaling only $563 million. In contrast, NVIDIA's decline was significantly better than AMD's, and the company will continue to gain more discrete graphics share.

Additionally, the overall performance of the PC market will also impact the company's gaming business. According to the latest data from IDC, the global PC market shipments in Q4 2024 are expected to be 69.3 million units, a year-on-year increase of 3.4%. The current PC market has entered a recovery phase, and since gaming graphics cards are primarily installed on PCs, this will have a certain positive effect on the company's gaming business.

This quarter, NVIDIA's gaming business experienced another decline, partly because the market is waiting for the upcoming RTX 50 series. Previously, the company anticipated launching the RTX 50 series gaming graphics cards in Q1 2025. The introduction of new products will drive a rebound in the company's gaming business and further increase its market share in discrete graphics.

3.3 Automotive Business: In Q4 of fiscal year 2025, NVIDIA's automotive business achieved revenue of $570 million, a year-on-year increase of 103%. NVIDIA's automotive business is primarily driven by its autonomous driving platform.

Current customers in NVIDIA's automotive business include mainstream automakers such as BYD, XPeng, Li Auto, and Mercedes-Benz, involving products like the Orin chip and Thor chip. With the increasing penetration of autonomous driving and upgrades to related products, the company's automotive business is expected to continue to grow well. However, due to the larger scale of data center and other businesses, the current share of the automotive business is still less than 2%. NVIDIA's performance still mainly focuses on the data center and gaming business.

IV. Key Financial Indicators

4.1 Operating Profit Margin

In Q4 of fiscal year 2025, NVIDIA's operating profit margin was 61.1%, slightly down from the previous quarter. Although the company's expense ratio decreased slightly this quarter, the decline in gross margin still directly affected the operating profit marginAnalyzing the composition of operating profit margin, the specific changes are as follows:

“Operating Profit Margin = Gross Margin - R&D Expense Ratio - Sales, Administrative, and Other Expense Ratio”

1) Gross Margin: 73% this quarter, a decrease of 1.6 percentage points quarter-on-quarter. The company's gross margin has come under pressure due to factors such as the ramp-up of Blackwell's new products;

2) R&D Expense Ratio: 9.4% this quarter, a decrease of 0.3 percentage points quarter-on-quarter. The absolute value of the company's R&D expenditure has increased, but due to the rapid growth on the revenue side, the expense ratio has declined again;

3) Sales, Administrative, and Other Expense Ratio: 2.5% this quarter, a decrease of 0.1 percentage points quarter-on-quarter. Although the absolute value has increased, the company's sales expense ratio remains at a low level.

The company's guidance for operating expenses in the first quarter of fiscal year 2026 continues to rise to $5.2 billion, but compared to the growth on the revenue side, the operating expense ratio is expected to remain at a low level of around 12% next quarter. Under the influence of rapid revenue growth, the expense ratio is in a healthy state.

4.2 Net Profit (GAAP) Margin

In the fourth quarter of fiscal year 2025, NVIDIA's net profit was $22.1 billion, a year-on-year increase of 79.8%. The net profit margin for this quarter is 56.2%, showing an improvement. The high growth in revenue this quarter continues to dilute the company's operating expense ratio. Although the gross margin has declined, the net profit margin has remained above 55%, a relatively high level.