70% Growth Forecast Becomes Biggest Surprise in Earnings Report
Morningstar believes the most important information in Nvidia's earnings report is not the better-than-expected Q2 revenue, but the company's forecast of approximately 70% revenue growth for fiscal 2028.
Second-quarter revenue was approximately $96 billion, a 106% year-over-year increase, surpassing the company's previous guidance of $91 billion. Nvidia expects third-quarter revenue to reach $108 billion, representing year-over-year growth of about 89%, also exceeding the market consensus of $105 billion compiled by FactSet.
The 70% growth forecast for the next fiscal year implies Nvidia's annual total revenue could approach $700 billion, whereas Morningstar and FactSet's previous estimates were around $570 billion. The company emphasized this is still a supply-constrained forecast, suggesting actual revenue could exceed the current outlook if supplier capacity ramps up faster.
Morningstar Raises Fair Value Estimate to $310
Morningstar has raised its fair value estimate for Nvidia from $280 to $310, assigning a four-star rating, a Wide Moat rating, and a 'Very High' Uncertainty Rating.
Despite the stock rising about 4% post-earnings, Morningstar still considers NVDA undervalued. The market appears to remain skeptical about the sustainability of AI capital expenditures, while Morningstar believes Nvidia's industry-leading AI equipment demand will remain robust for a longer period.
Nvidia projects that the AI capital expenditures of the top five U.S. hyperscale cloud customers next year will reach $1.3 trillion, higher than the previous market estimate of approximately $1 trillion. AI token usage continues to grow exponentially, and GPU rental prices remain elevated, indicating that AI accelerator supply remains tight.
Gross Margin Decline is the Only Apparent Flaw in the Report
Morningstar views the gross margin outlook as the only apparent shortcoming in this earnings report. Nvidia expects its gross margin to decline from 75% in the July quarter to 74% in the October quarter, further dropping to 71.5% in the January quarter, and averaging around 72.5% for fiscal 2028.
The gross margin pressure primarily stems from significant increases in memory prices. Memory is a crucial component of Nvidia's AI racks, and tight supply coupled with rising procurement costs could erode profit margins.
Therefore, NVDA's current core contradiction is clear: demand and revenue growth are stronger than market expectations, but memory costs and supply constraints may compress the quality of earnings. The $310 fair value provides an upside reference for the stock price, but the 'Very High' Uncertainty Rating also implies that any shortfall in capital expenditure or margins could trigger a significant pullback.
