NVDA posted an 8k on the SEC Edgar website that contains the press release the company issued summarizing its latest quarterly results. To my mind, the key figures are on the first page under the title Q2 Fiscal 2025 Summary. They’re in the last two columns on the Gross margin line.

Y/Y the company’s gross margin (basically what it pays TSMC to make its chips as a percentage of their sales price to customers) at 75.1% is up by 5.0 percentage points. Q/Q it’s down by 3.3 percentage points.

My guess is that this is more a confirmation of the company’s competitive situation–with 75% as the upper bound for the gross margin–than startling new information. If we assume that current analyst estimates (which I’m seeing on the Fidelity website) are reasonably accurate–and they should be more so than in the recent past because margin expansion is off the table as a variable–eps over the coming year should be $3.50-$4.00 a share. This would imply NVDA is trading at a forward PE, given a current price of $118, of about 30x.

To my mind, that’s a reasonable number. It’s not a bargain basement valuation, but given the company’s record of innovation over a long period of time it shouldn’t be. The two big issues I see for the coming year are: the timing of the wide availability of the next iteration of the company’s AI chips and–more crucial, I think–if/when big customers will be able to substitute in house developed semiconductors for lower-end NVDA offerings.

NVDA reported its latest quarterly results after the close yesterday. My thoughts:

–NVDA’s gross income has been expanding very strongly over the past couple of years because sales of its AI chips have been exploding upward and because its most important cost, the compensation of its researchers, has been rising at a much slower rate. My reading of the income statement said that, having reached margins of 75% or so, there wasn’t much more operating leverage to be had. If margin expansion was most likely at an end, then sales growth would be the sole driver of income gains. My question was how many owners, or potential owners, had looked at the accounts. Not many was my answer to myself.

So I was pleasantly surprised that the revelation of this phenomenon overnight only caused the stock to decline by about 3%. We’ll learn more when trading opens.

—Hindenburg, the professional short-seller, issued a report on Super Micro Computer (SMCI). Hindenburg states that SCMI was delisted a number of years ago because it could not produce accurate financial statements. The company fired executives who were responsible for manipulation of accounts and was subsequently relisted. However, Hindenburg asserts, the company rehired the same executives, who went back to their old habits. Hence, SMCI’s apparent inability to produce accurate financials now.

A second point. NVDA has developed alternative distribution partners, among them Dell, which, Hindenburg says, is distributing AI servers at cost to gain market share. If so, not good news for SCMI.

There’s the issue of the Republican candidate–the checkered real estate career, the attempt to overthrow the government, the enormous inflow of money from the Middle East into his pockets, the question of if and to whom he revealed the top secret documents he left office with. There’s also what appears to be his serious loss of cognitive capacity, something that has become more visible since the shadow of Biden’s more acute decline has been removed. The Handmaid’s Tale-ish beliefs of many of his supporters is another concern.

From a purely economic view, though, I see three main problems with the Republican program:

–the domestic working population is barely growing. More than half the current growth in GDP comes from immigrants. A halt to immigration would cut domestic economic growth in half, making us look a lot like Japan circa 1990–which was the start of a period of economic stagnation that is now in its fourth decade

—tariffs, which Trump is touting as a major economic weapon, have an extremely checkered history. The tariff wars of the 1930s deepened and lengthened the Great Depression. The tariffs “protecting” the domestic auto industry from Japanese imports ended up (as tariffs seem always to do) destroying Detroit by allowing it to postpone modernizing its offerings. GM ended up losing two-thirds of its domestic market share

–in the pre-Volcker world, the incumbent president would arm-twist the Federal Reserve into loosening monetary policy during an election year. The idea was to give the domestic economy some extra oomph by lowering interest rates that would make reelection more likely. In theory, the added stimulus would be removed after Election Day. In the 1970s (and ex Gerald Ford, who refused to stimulate …and subsequently lost his election) presidents conveniently forgot to do this second part. The result was runaway inflation. By the end of Carter’s term, inflation was running at close to 10%, and accelerating. This undermined the value of the dollar, and of financial assets, including government bonds. Industrial companies shifted from making things to buying gold mines. Carter appointed Paul Volcker and instructed him to run an independent Federal Reserve, a policy Reagan continued.

It took long Treasuries at 20%–short-term loans at 26%–a very deep recession, widespread bankruptcies in the savings and loan industry, and decades of follow-through by the Fed to eventually get inflation under control.

The dramatic rise in oil prices during the 1970s played a significant role in pushing the overall price level higher. On the other hand, OPEC’s moves obscured what economists today see as the more damaging role of the executive branch in creating inflation.

Trump lived through this period as an adult, and as a businessman in the real estate industry, which typically has a high degree of financial leverage. Yet he’s calling for a return to the 1970s system. It’s striking that he can’t remember.

I have a relatively big, for me anyway, position in NVDA, thanks to a son who beat me over the head with the idea about five years ago. I’ve been selling a bit over the past several months based mostly on position size.

I have two contrary thoughts on the stock right now. On the one hand, NVDA has had an impressive recovery from its July-August selloff. After falling by about a quarter, the stock has rallied back to within 8% or so of its all-time high. One might quibble that volumes haven’t been as strong during the rebound as they were earlier in the year, but I still find the stock action impressive.

On the other, the stock’s dramatic rise is the product of two forces, as I see it: spectacular revenue growth (+370% yoy in the April quarter) and, at least as important in my view, the operating leverage derived from the much slower expansion (+39% yoy) of R&D and SGA expense–which resulted in a +800% rise in operating income. It isn’t clear to me that there’s a lot more operating leverage left to help fuel positive earnings surprises, though. If we’re closing on the end of that road, then we’re much more reliant on surprisingly strong revenue growth to move the stock higher. If so, does the consensus realize this?

I suspect the upcoming earnings report after the close on Wednesday will be an important indicator of how much more near-term oomph is left in the stock.

I googled this before starting to write. Most of what I found was, well, ridiculous. Not that the definitions were wrong, but to my mind the interpretations were at best incomplete.

Every publicly-traded company has three sets of accounting statements: management control books to run the company, tax books to show the IRS, and financial reporting books to show you and me. We don’t get to see the first set at all–they’re about structuring operations into cost centers vs. profit centers as well as tax planning. And we only get a glimpse at the second through the reconciliation in the financial reporting tax footnote of the dour view the IRS sees vs. the much rosier picture presented to shareholders.

The margins themselves are calculations of various levels of profit–gross, operating, pre-tax, net… as a percentage of sales.

My take:

–the general perception is that high margins are better than low ones. To some degree that’s true. The obvious worry, though, is that if margins are too high they’ll will attract competitors

–the margin numbers themselves aren’t the whole story, either. Tiffany, one of my favorite companies to have new analysts work on back in the day, but which is now a part of LVMH, had a pre-tax margin of 15% in its final year as a public company. On the surface, that’s pretty/really good. But the nature of the company’s business requires it to carry finished goods inventory equal to about a year’s sales, with raw materials + work in process equal to about another six months’. So a good chunk of that margin represents the cost of maintaining the right level of stuff to sell in its stores and the risk that some expensive items may just gather dust. Then, of course, there’s the expense of maintaining its store network. Yes, an attractive margin, but not the bonanza the raw pre-tax margin might be read as implying

–the relationship between payables and receivables is another factor to consider. Generally speaking, it’s a sign of strength if a company can get paid for its wares faster than it has to pay its suppliers. Put in balance sheet terms, this means Payables (to suppliers) would be significantly greater than Receivables (from customers). This is the case with Tiffany. In the negative case, however, a firm could “manufacture” sales and profits by offering super generous payment terms. Chances are high, in my view, that this situation will end in tears. Whether it does or not, a blowout in Receivables can create phantom profits (and operating margin) that make a firm look better than it is. Same thing with a shrinkage in Payables, which may signal that suppliers are worried about extending credit. The point is that while potential bad news may not have shown up in margins, investors will presumably be reacting to deterioration in the payables/receivables relationship.