Dell had the unfortunate timing of reporting earnings at the moment tariffs threats increased, with China to see 20% tariffs starting as soon as next week. Dell is exposed to tariffs as a report from 2023 stated China revenue falls between 8% and 14% of sales.

In addition, Dell is the clearest supplier yet to illustrate the impact of the NVL systems being delayed. This quarter, the company stated they project $15B in AI shipments this year, yet in Q4, AI orders were $1.7 billion, down (53%) QoQ and shipments of $2.1 billion, down (28%) QoQ with $4.1 billion in backlog as customers work through technology changes. If Wall Street didn’t get the point from Nvidia’s fairly vague commentary, then Dell made it abundantly clear by offering shipments and backlog, which Supermicro and others do not offer.

Down the income statement, the company reported mixed results. Revenue grew by 7.2% YoY to $23.93 billion, missing estimates by 2.6%. While adjusted EPS grew by 18.1% YoY to $2.68, beating estimates by 6.4%.

Management guided Q1 revenue in the range of $22.5B to $23.5B, representing a YoY growth of 3.4% at the midpoint, missing estimates by 3% and expects adjusted EPS to grow 25% YoY to $1.65.

Management has guided $15 billion in AI shipments for FY2026. The company’s AI server backlog increased from $4.5 billion in Q3 to $9.0 billion in Q4, primarily driven by the recent deals, including xAI.

Where Dell and Super Micro may both be seeing lower growth than expected likely goes back to the delivery of key Nvidia systems, where the larger systems lead to higher revenue (and you’re aware by now these were delayed by “couple months”). It’s also perhaps due to Nvidia’s partnership with Foxconn, who has seen more news lately than peers Dell and Supermicro in terms of shipping Blackwell systems. According to a news report from Economic Daily the GB200 was shipped by Foxconn in small quantities at the end of Dec and is expected to be shipped in large quantities at the end of January. Nvidia is expected to unveil the GB300 AI server product line at the GTC conference in March.

Ultimately, this is one more supplier that is offering a muted outlook. Per Knox’s webinars, IOF has been preparing for a rout of sorts. Our goal has been to add to AI positions during the rout. With that said, we have must-hold levels and will let you know if Dell breaks our must-hold.

Revenue

Q4 revenue grew by 7.2% YoY to $23.93 billion driven by the 22% YoY growth in the ISG segment. However, the revenue fell short of estimates by 2.6%.

• Management guided Q1 revenue in the range of $22.5B to $23.5B, representing YoY growth of 3.4% at the midpoint, missing estimates by 3%.
• Analysts expect revenue to grow 1.8% YoY to $25.5 billion in Q2 and 9.3% YoY to $26.6 billion in Q3.

• FY2025 revenue grew by 8.1% YoY to $95.57 billion. The management guide for the FY2026 is $101B to $105B, representing YoY growth of 7.8% at the midpoint of $103 billion, slightly missing the consensus estimate of $103.62 billion.
• Analysts expect FY2027 revenue to grow 6.8% YoY to $110.71 billion.

Key Operating Segments

Infrastructure Solutions Group

ISG revenue grew by 22% YoY and flat QoQ to $11.4 billion. Revenue growth decelerated from 34% in Q3.

In Q4, AI orders were $1.7 billion, down (53%) QoQ and shipments of $2.1 billion, down (28%) QoQ while management mentioned that $4.1 billion is in backlog as customers work through technology changes. The company’s AI server backlog increased from $4.5 billion in Q3 to $9.0 billion in Q4, primarily driven by the recent deals, including the $5 billion from XAI. Management has guided $15 billion in AI shipments for FY2026.

The company reported a record ISG operating income of $2.1 billion, up 44%. This was driven primarily by higher revenue. The ISG operating margin was 18.1% compared to 15.3% in the same period last year.

• Servers and Networking revenue grew by 37% YoY and down (10%) QoQ to $6.6 billion.
• Storage revenue grew by 5% YoY and 18% QoQ to $4.7 billion.

Regarding Dell’s AI server solutions, the company highlighted the Power Edge servers and the ability to scale up and scale in the opening remarks:

“We added five platforms to our AI-optimized portfolio, including support of Blackwell architectures, the highlight being the PowerEdge XE9712 supporting NVIDIA's NVL72 GB200, which we were the first to ship in the world. We launched the Dell Infrastructure Rack Scalable System, our IR7000 and 5000 in both 21-inch and 19-inch versions, providing up to 96 GPUs in a rack and 786 GPUs in a scalable unit. We have made significant advancements with CDUs, cold plates, manifolds and power distribution with our IR7000 supporting up to 480 kilowatts per rack.”

The company also benefits from the increase needs of storage due to data-hungry AI models: “We made significant advancements to PowerStore with PowerStore Prime, our mid-range storage solution addressing the fastest-growing portion of the market. And we introduced the PowerScale F910 and F710 in our unstructured portfolio that is primed to support unstructured and AI workloads.”

Client Solutions Group

Client Solutions Group revenue grew by 1% YoY and down (2%) QoQ to $11.9 billion. The CFO said in the earnings call, “We saw some promising signs as we went through November and December with pockets of strength in large deals, but overall saw a slowdown in January. As Jeff mentioned, we saw strength in small and medium business, which is historically a leading indicator.”

The CSG operating margin was 5.3% of revenue compared to 6.2% of revenue in the same period last year and was also down 90 basis points sequentially due to a more competitive pricing environment.

• Commercial revenue was up 5% YoY and down (1%) QoQ to $10 billion.
• Consumer revenue declined by (12%) YoY and (5%) QoQ to $1.9 billion.

When AI PCs take off, Dell will be a beneficiary with the following stated on the call regarding their participating in both Arm-based and x86-based PCs: “We introduced the most Copilot+ PCs powered by ARM-based Qualcomm Snapdragon processors and also launched the broadest portfolio of Intel Lunar Lake commercial PCs, furthering our number one leadership position in commercial AI PCs worldwide.”

Operating Margins Stronger than Expected

The company’s margins improved due to the operating leverage and higher profits in the ISG segment driven by the Dell IP storage portfolio. The company also discovered previously unrecognized accumulated credits from suppliers and have revised the margins slightly higher than the previous figures. However, the company’s gross margins are feeling pressure due to increasing competition faced in the CSG segment and also the increase in AI revenue.  

• The gross margin was 23.7% compared to 24.1% in the same period last year. Adjusted gross margin was 24.3% compared to 24.8% in the same period last year. The lower gross margin was due to a higher AI-optimized server revenue mix and lower profits in the CSG segment due to increased competition. The gross margin rate will be lower sequentially given seasonally lower storage mix and a higher AI-optimized server mix.
• The operating margin was 9% compared to 6.9% in the same period last year. Adjusted operating margin was 11.2% compared to 9.8% in the same period last year. The improvement in the operating margin was due to higher revenue and lower operating expenses.
• Net margin was 6.4% compared to 5.4% in the same period last year. The adjusted net margin also showed improvement as it reported 8% compared to 7.4% in the same period last year.

• FY2025 adjusted gross margin was 22.8% compared to 24.5% in FY2024. Management expects adjusted gross margin to be down 100 basis points in FY2026 due to a higher mix of AI-optimized servers and the current competitive environment.
• FY2025 operating margin improved 40 basis points to 6.5%. Adjusted operating margin remained the same at 8.9%.
• FY2025 net margin improved 100 basis points to 4.8% and adjusted net margin remained the same at 6.1%.

Adj.EPS grew by 18.1%

• Q4 adjusted EPS grew by 18.1% YoY to $2.68, beating estimates by 6.4% driven by operating leverage and improvement in the ISG segment operating margin and partly helped by revisions from the previously unrecognized accumulated credits from suppliers.
• Management expects Q1 GAAP EPS to be $1.29, down (6%) YoY and adjusted EPS to grow 25% YoY to $1.65.
• Full-year FY26 GAAP EPS expected to be $7.85, up 23% year over year, and adjusted EPS to be $9.30, up 14%.

When the time comes for AI servers to ship in volume, one thing to keep in mind is Dell’s operating leverage compared to other hardware peers – here is how the CFO described it with double digit growth that exceeds revenue growth: “Now let's look at operating income. We delivered a 22% increase to $2.7 billion or 11.2% of revenue. This was driven by higher revenue and lower operating expenses, partially offset by a decline in our gross margin rate. Q4 net income was up 15% to $1.9 billion primarily driven by stronger operating income. And our diluted EPS was up 18% to $2.68.”

Cash Flow and Balance Sheet

The company’s cash flows were lower due to lower CSG revenue and also higher inventory to support the AI demand. This was clarified by the management in the earnings call Q&A as they expect cash flows to improve this year with higher CSG revenue.

Q: Amit Daryanani (Analyst)

Thanks a lot. I guess I have a question on free cash flow. In fiscal '25, it looks like your free cash flow is down a couple of billion dollars versus '24. Can you just talk about what's driving this contraction in free cash flow? And maybe, Yvonne, you can help us kind of understand how do we think about free cash flow expectations as we head into fiscal '26? What are sort of puts and takes around it? It would be really helpful to kind of get the context, at least for fiscal '26, what's going on?

A: Tyler Johnson (Vice President and Treasurer)

“Amit, look, I think — as I was sitting here last year, I definitely thought cash flow was going to be a little bit stronger. If you look at what played out, one, we didn't see the growth in CSG that we were expecting. And as you know that throw off really good cash. And then two, we invested a lot in our AI business through inventory. And so you can see that our inventory has gone up, and that had a big impact to CCC. Now if I look where I am today and I think about FY '26, I would say I've got a few things working in my favor. So one, we're at a CCC level where historically, we've always shown improvement from here. And that will throw off good cash. We expect good CSG this year, and that will throw off good cash. And if I think about the growth in the P&L, that will throw off good cash. So look, I think we feel pretty good about cash. I do expect it to be greater than 1x and so yes.”

— End of Quote

• Q4 operating cash flow margin was 2.4% compared to 6.9% in the same period last year.
• Q4 free cash flow margin was (-0.5%) compared to 3.6% in the same period last year and adjusted free cash flow margin was 2.0% compared to 4.5% in the same period last year.
• Cash and investments were $5.13 billion and debt of $24.57 billion compared to $6.5 billion and $25.02 billion in Q3.
• Inventories were $6.7 billion in Q4 compared to $6.65 billion in Q3. However, it was significantly higher than the $3.62 billion in the same period last year to support the AI demand.  
• The company repurchased shares worth $734 million and paid dividends of $311 million.
• It also announced an 18% increase in the annual dividend to $2.10 per share. Additionally, the Board of Directors has approved a $10 billion increase in the share repurchase authorization.

Earnings Call:

Blackwell Margins to be Lower than Hopper Margins; Yet Dell Likely Will Win the Margin Battle

Margins are a key issue with hardware suppliers, and Dell stated Blackwell margins will be lower than Hopper margins, which is something to watch as the next architecture ramps: “I mentioned in the last call that the Blackwell margins were lower than the Hopper margins and remains so today. We're still early. The deals are very large upfront. There's more competitors, so it's a more competitive landscape.”

An analyst pointed out that despite growing their mix of AI server revenue, Dell guided for ISG margins to be flat – which is a win since AI servers are supposed to weigh on margins. Dell’s response is they will leverage storage to offset any margin weakness from AI servers.

In terms of Dell’s thesis, I would place margins equal to its AI server backlog, which is why I’m starting with this piece rather that AI in the call summary.

“Michael Ng

Hi good afternoon. Thank you for the question. I just have one on the ISG margin outlook of flat year-over-year for the upcoming year. It's a great outlook, particularly considering AI server revenues growing 50%. So can you talk a little bit about the expectations for margins for some of the components, traditional servers, storage AI servers? I'm just trying to understand the ability to keep ISG margins flat despite presumably the dilutive effect from the AI server margins. Thank you.

Jeff Clarke

I think, Mike, maybe the way to look at this is the, first and foremost, as we think about holding ISG margins flat, I love the way that you asked the question, we're going to do that by growing at least $15 billion in AI servers. I know your question is how we're going to do that. But for us, that's a very important mark that we're going to be able to meet that operating range that we've committed in our long-term framework and we're going to grow at a minimum of $15 billion in AI servers. And we're going to do that by what we've done in traditional servers and what we've done in storage. The storage leverage that Yvonne talked about earlier is front and center. When we grow the storage business and we control our expenses, scale matters, the operating margins improve. When we pivot to Dell IP storage, which we have done, our margins improve. The margins of our own IP are vastly superior than third-party IP. We've been doing that for some time.”

— End Quote

Dell Calms Supply Fears About Blackwell

Dell is the perfect company to corner on the GB200s shipping and if there is a “supply” issue. This is also the perfect question to ask as DeepSeek has greatly obfuscated the issue to where the media is focused on demand (which is def not the problem for 2025!!). Supply is the issue, to where rather than there being supply constraints (like during Covid), there are supply hiccups.

I find there are two kinds of management teams – those that are transparent and take it on the chin for being so, and those who are more vague and hope the market skates over their commentary. Dell is the former.

Samik Chatterjee

Hi, hopefully you can hear me now. Jeff, I just wanted to go back to some of your prepared remarks and — about the $15 billion of AI server revenue that you were highlighting that you at least expect to grow to that level. Just wondering, how much of that is gated by supply, particularly versus the visibility into supply that you're getting? And how much of that commentary around sort of at least growing there is a supply dynamic versus a demand dynamic? And should we be expecting more sort of linear growth for the quarter as we think about the — with visibility on supply? Thank you.

Jeff Clarke

Well, I think clearly, Hopper supply is available today. I believe there is references yesterday that Blackwell is in production and ramping. We're open for business and taking orders. The message that I really wanted to drive in our remarks is on day 27 of the fiscal year, we're trying to communicate that we are at least $15 billion in AI shipments. Our 5-quarter pipeline continues to grow. It's several multiples of our backlog. We are going to pursue every opportunity with the CSPs and in enterprise. These large-scale systems are accelerating and getting bigger. Models are quickly moving to reasoning models, which consume and require more computational capability, i.e., more computers. And the use cases continue to get clearer for enterprise to drive the return on investments they want to see to actually use AI more broadly. Algorithm innovation continues to accelerate. Again, these reasoning models are — will consume more computational capability. They're moving to be multimodal, which even consumes more kind of like where this is going. We're optimistic. I don't see supply as an issue. Clearly, these are about building the right architecture. There's a customer preparation or customer readiness component of this, new data centers getting powered, getting water, getting cooling. There's other materials beyond the GPU, getting the rack, getting the cold plates, getting the CDUs, the PDUs, all of that is what we orchestrate. We have line of sight that is at least $15 billion. We'll continue to update as that might change. And we're all in. I don't know what else I can tell you. I hope that helped.

Conclusion:

Dell’s server shipments QoQ makes it abundantly clear they were impacted by the delay in Blackwell NVL server shipments. How any issues are sorted will be fluid, as any supplier that can alleviate the issues around standing up the systems will be exponentially rewarded while those who falter will be eliminated. Dell’s $15B is lower compared to Supermicro with annual FY estimates of $24B. However, Dell is quickly catching up. What separates the two is the operating leverage, the more trustworthy management team (given SMCI has been in the crosshairs of the SEC lately), and the AI PC story that will materialize eventually.

Given the weak price action AH, we have a must hold level for Dell as the market is panicked right now over tariffs and weak AI supplier commentary (officially across the board now that we have Dell’s more transparent report on server shipments). Our goal is to not get shook out the position, while adhering to risk management. We will keep you in the loop if the must hold breaks.

I/O Fund Equity Analyst Royston Roche contributed to this article.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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Compared to any other stock on Wall Street, Nvidia reported an exceptional quarter. Yet, Nvidia’s stock is competing with itself at this point, and when compared to previous Nvidia earnings reports, Q4 and Q1 represent a pause in the fireworks. 

Nvidia reported $11 billion in Blackwell revenue, however, Huang finally admitted the NVL systems are in production (i.e., not shipping in volume). Rather, other SKUs are making up Blackwell revenue for now. According to a discussion with an analyst, Nvidia foresees NVL systems and the next generation Blackwell Ultra ramping “simultaneously” — which increases the pressure to deliver this fiscal year given there was a “couple months” delay with the NVL systems.  

Fortunately, for the I/O Fund, we use technicals to reduce risk. When there is a change in story, even if it’s transitory by a quarter or two, we rely on technicals to protect our position while maximizing the upside. As you know, we are exposed to Nvidia — yet heavily exposed when you consider its ecosystem. 

We also hold our management teams accountable, and not even Jensen Huang should get a free pass. Investors should have been provided more transparency on when the premier SKU will be shipping in volume, since it was originally slated for Q1. Below, I outline the reasons that H2 is likely to be the catalyst for the next leg higher, whereas Q1 may not have been enough to cause the stock to break out. With that said, semiconductors see intra-quarter news more frequently than software peers, and thus, this could change anytime.  

Nvidia’s valuation remains very attractive. I stated on Fox yesterday that Nvidia and its suppliers are the best trade of the year – the question that remains is timing. If the NVL systems were shipping in volume, the supply chain would be on fire right now – is what I mean by timing. I also pointed out that investors do better when proxies participate – whether that’s suppliers providing a clear, green light or an ETF like SMH, which is 14% off ATHs. 

I look at this and more below! 

Revenue Beat/Raise (Again) 

Nvidia beat consensus estimates by just $1.15 billion this quarter, its smallest beat of the last seven quarters, as it reported revenue of $39.33 billion, up 77.9% YoY and 12.1% QoQ. Management reported that Blackwell was witnessing the fastest product ramp in company history, delivering $11 billion in Blackwell revenue in Q4. 

For FY25, Nvidia reported revenue growth of 114% YoY to $130.5 billion, marking a consecutive year of triple digit growth after revenue rose 126% YoY in FY24. 

For Q1, Nvidia guided for revenue of $43 billion, +/- 2%, representing growth of 65.1% YoY and 9.3% QoQ at midpoint, slightly ahead of estimates for 61.2% YoY growth to $42 billion. As we had noted in our pre-earnings analysis, some analysts were looking for as much as $47 billion in revenue in Q1. On a sequential basis, Q1 is also estimated to see QoQ growth dip to the single-digit range at the midpoint of guidance, slowing nearly 3 points from Q4.  

Margins to Improve H2 

Margins are expected to contract sequentially in Q1 as Blackwell ramps, with management having stated in Q3 that gross margins were expected to dip to the low-70% level as Blackwell begins to ramp before returning to the mid-70% range. 

Gross margins in Q4 were in-line with prior guidance, though operating margins came in ahead of guidance as Nvidia continued to benefit from strong operating leverage. 

• Q4 GAAP gross margin was 73%, contracting from 74.6% in Q3. For Q1, GAAP gross margin is expected to contract further to 70.6%.  
• Adjusted gross margin was 73.5% in Q4, down from 75% in Q3, with management guiding for another contraction to 71% in Q1. 
• Q4 GAAP operating margin was 61.1%, contracting from 62.3% in Q3. For Q1, GAAP operating margin is expected to drop below 60%, with management’s expense guidance implying a 58.5% margin.  
• Adjusted operating margin was 64.9% in Q4, down from 66.3% in Q3, with Q1 forecast to contract further to 62.6%. 
• Q4 GAAP net margin expanded slightly sequentially to 56.2%, though Q1’s net margin is implied to be 50.1% due to the QoQ gross and operating margin contractions. 

For FY25, margins expanded on a YoY basis despite contracting in the back half of the year. FY25’s GAAP gross margin was 75%, up from 72.7% in FY24. GAAP operating margin expanded 8.3 points YoY to 62.4%, as GAAP operating income increased 147% YoY to $81.5 billion. GAAP net margin increased 7 points YoY to 55.9% with a similar 134% YoY rise in net income to $86.8 billion. 

EPS 

Q4 GAAP EPS increased 82% YoY to $0.89, beating estimates for $0.80. Adjusted EPS of $0.89 beat estimates for $0.85. Growth is expected to moderate to the ~50% range in the coming quarters, likely pressured by falling margins due to Blackwell’s ramp. 

• Q1 adjusted EPS is expected to rise 49.4% YoY to $0.91. 
• Q2 adjusted EPS is expected to rise 50.2% YoY to $1.02. 

Cash Flows and Balance Sheet 

Operating and free cash flows both decreased slightly sequentially, with management explaining that this was due to a “a higher accounts receivable balance due to shipment linearity and increased inventory to support our Blackwell product ramp.” Both inventories and accounts receivables showed strong QoQ growth. 

• Operating cash flow in Q4 was $16.63 billion, down from $17.63 billion in Q3. OCF margin was 42.2%, more than 8 points lower than Q3’s 50.3% margin. FY25’s operating cash flow was $64.09 billion, rising 128% YoY and representing a margin of 49.1%, up 3 points YoY. 
• Free cash flow was $15.52 billion in Q4, down from $16.79 billion in Q3. FCF margin was 39.5% in Q4, down from 47.9% in Q3. For FY25, free cash flow rose 125% YoY to $60.72 billion, for a margin of 46.5%, up 2.3 points YoY. 
• Cash and marketable securities totaled $43.21 billion, while debt totaled $8.46 billion. 

Inventories, accounts receivable and purchase commitments all rose quite substantially on a sequential basis as Nvidia prepares to ramp Blackwell throughout the year. 

• Inventories rose nearly 32% QoQ to $10.08 billion, representing a sequential rise of $2.43 billion.  
• Accounts receivable rose $5.4 billion QoQ to $23.1 billion. 
• Purchase commitments and obligations for inventory and manufacturing capacity rose $1.9 billion QoQ to $30.8 billion. 

Key Segments 

Data Center 

Data center revenue rose 93% YoY and 16% QoQ to $35.58 billion in Q4, driven primarily by GPUs as networking revenue was soft. Compute revenue rose 116% YoY and 18% QoQ to $32.56 billion in Q4, though Networking revenue declined (9%) YoY and (3%) QoQ to $3.02 billion. 

Management noted that they “delivered $11.0 billion of Blackwell architecture revenue in the fourth quarter of fiscal 2025, the fastest product ramp in our company’s history,” driven by major CSPs which accounted for 50% of data center revenue. Q4 growth was also aided by sequential growth for the H200. 

For Networking, Nvidia said that it is “transitioning from small NVLink 8 with Infiniband to large NVLink 72 with Spectrum X,” with growth in Ethernet and NVLink products related to the Grace Blackwell ramp. 

For FY25, data center revenue rose 142% YoY to $115.2 billion, driven by a 162% YoY increase in Compute revenue to $102.2 billion, with Networking revenue rose just 51% YoY to $12.99 billion. 

Other Segments 

• Gaming revenue declined (11%) YoY and (22%) QoQ to $2.54 billion, due to “limited supply for both Blackwell and Ada GPUs.” For FY25, gaming revenue rose 9% YoY to $11.35 billion. 
• Automotive revenue rose 103% YoY and 27% QoQ to $570 million, driven by self-driving platform sales. For FY25, automotive revenue rose 55% YoY to $1.69 billion. 
• Pro Viz revenue rose 10% YoY and 5% QoQ to $511 million, driven by a “continued ramp of Ada RTX GPU workstations for use cases such as generative AI-powered design, simulation, and engineering.” For FY25, Pro Viz revenue rose 21% YoY to $1.88 billion. 
• OEM and other revenue rose 40% YoY and 30% QoQ to $126 million. For FY25, OEM and other revenue rose 27% to $389 million.

Earnings Call:

NVL 72 Systems and Blackwell Ultra 

Of the $200 billion in revenue expected this year, roughly $100 billion is expected to come from NVL systems which comes out to 30,000 to 35,000 racks at $3 million per rack. Given there is evidence of a delay, there was bound to be a question about this on the call. Overall, the answer helps to alleviate if the systems are ready yet (they have “ramped production” but not stated they were shipping in volume).  

The remaining issue is if both Blackwell’s NVL systems and Blackwell Ultra (the next generation of GPUs) can ramp "simultaneously” (which was not the original road map). Perhaps these two can successfully ramp simultaneously, but it’s also important to acknowledge this was not the original plan. Personally, I think the hiccup discussed below should be explained more as to when the systems will ship in volume, since it was originally expected to be Q1. Judging by analyst estimates, the October quarter will see higher QoQ growth in terms of revenue at $5 billion compared to analyst estimates of $4 billion for the previous quarter.  

Harlan Sur  

Good afternoon. Thanks for taking my question. Your next-generation Blackwell Ultra is set to launch in the second half of this year, in line with the team's annual product cadence. Jensen, can you help us understand the demand dynamics for Ultra given that you'll still be ramping the current generation Blackwell solutions? How do your customers and the supply chain also manage the simultaneous ramps of these two products? And — is the team still on track to execute Blackwell Ultra in the second half of this year? 

Jensen Huang  

Yes. Blackwell Ultra is second half. As you know, the first Blackwell was we had a hiccup that probably cost us a couple of months. We're fully recovered, of course. The team did an amazing job recovering and all of our supply chain partners and just so many people helped us recover at the speed of light. And so now we've successfully ramped production of Blackwell. 

But that doesn't stop the next train. The next train is on an annual rhythm and Blackwell Ultra with new networking, new memories and of course, new processors, and all of that is coming online. We've have been working with all of our partners and customers, laying this out. They have all of the necessary information, and we'll work with everybody to do the proper transition. This time between Blackwell and Blackwell Ultra, the system architecture is exactly the same. It's a lot harder going from Hopper to Blackwell because we went from an NVLink 8 system to a NVLink 72-based system. So the chassis, the architecture of the system, the hardware, the power delivery, all of that had to change. This was quite a challenging transition. 

But the next transition will slot right in Blackwell Ultra will slot right in. We've also already revealed and been working very closely with all of our partners on the click after that. And the click after that is called Vera Rubin and all of our partners are getting up to speed on the transition of that and so preparing for that transition. And again, we're going to provide a big, huge step-up. And so come to GTC, and I'll talk to you about Blackwell Ultra, Vera Rubin and then show you what we place after that. Really exciting new products, so to come to GTC piece. 

–End Quote 

The $11 billion is likely coming from other SKUs as we pointed out in our pre-earnings analysis “There is certainly a scenario where Nvidia’s GPUs are in such high demand that other SKUs can help make up for a delay on the much-larger GB200 NVL systems.” The additional evidence of this is the QoQ decline in networking as these systems would certainly drive QoQ growth in networking, making the clear readthrough that other SKUs are driving the $11 billion. 

When asked if there were bottle necks to consider with NVL 72 systems specifically, the CEO avoided discussing NVL72 systems and redirected to a more general discussion on the Grace Blackwell architecture. He also pointed toward single use cases that have “come online” rather than a “shipping in volume” discussion: “You've probably seen on the web, a fair number of celebrations about Grace Blackwell systems coming online and we have them, of course. We have a fairly large installation of Grace Blackwell goes for our own engineering and our own design teams and software teams. CoreWeave has now been quite public about the successful bring up of theirs. Microsoft has, of course, OpenAI has, and you're starting to see many come online. And so I think the answer to your question is nothing is easy about what we're doing, but we're doing great, and all of our partners are doing great.” 

TAKEAWAY: The NVL 72 systems are probably not shipping in volume right now, but should be soon (if they’re in production). This will run close to Blackwell Ultra’s launch. Demand will not be an issue rather it’s unusual to see two generations ship this close to one another, and it will require a smooth supply chain  

Custom Silicon Not a Threat for 4 Reasons 

Concerns around timing of shipping for Blackwell SKUs will be transitory yet concerns with custom silicon are here to stay. Since the very first day of covering the AI story in 2018, I have been fielding concerns around custom silicon as Google’s TPUs were all the rage in 2018. It was actually expected at the time that Google’s TPUs would transition to merchant sales and directly compete with Nvidia. Nearly seven years later, that has not materialized. 

Below, is how Jensen Huang describes the challenges around custom silicon. He points toward custom silicon being application specific whereas GPUs are more flexible (this part is key), the software layer, as well as the fact that a lot of custom silicon does not make it to full production. Because investors will be fielding this concern into the foreseeable future, I’ve noted the response and four reasons below: 

1. General versus application specific: “NVIDIA's architecture is general whether you're — you've optimized for unaggressive models or diffusion-based models or vision-based models or multimodal models or text models. We're great in all of it […] And so by definition, we're much, much more general than narrow” 
2. Nvidia is Everywhere: “So we're general, we're end-to-end, and we're everywhere. And because we're not in just one cloud, we're in every cloud, we could be on-prem. We could be in a robot. Our architecture is much more accessible and a great target initial target for anybody who's starting up a new company. And so we're everywhere.” 
3. Performance: “And if our performance per watt is anywhere from 2x to 4x to 8x, which is not unusual, it translates directly to revenues. And so if you have a 100-megawatt data center, if the performance or the throughput in that 100-megawatt or the gigawatt data center is 4 times or 8 times higher, your revenues for that gigawatt data center is 8 times higher.” 
4. What Nvidia Does is Hard – the Hardware and the Software is hard to replicate: “And the ecosystem that sits on top of our architecture is 10x more complex today than it was 2 years ago. And that's fairly obvious because the amount of software that the world is building on top of architecture is growing exponentially and AI is advancing very quickly. So bringing that whole ecosystem on top of multiple chips is hard.”

China Increases in Geo Mix for Q1 

An analyst pointed out that China will be increasing in geographic mix for Q1.  

Here is the concern from the analyst: “And I think there is a concern about whether U.S. can pick up the slack if there's regulations towards other geographies. And I was just wondering, as we go throughout the year, if this kind of surge in the U.S. continues and it's going to be — whether that's okay. And if that underlies your growth rate, how can you keep growing so fast with this mix shift towards the U.S.? Your guidance looks like China is probably up sequentially. So just wondering if you could go through that dynamic and maybe collect can weigh in.” 

This may be a moot issue, as management stated: “China is approximately the same percentage as Q4 and as previous quarters. It's about half of what it was before the export control. But it's approximately the same in percentage” but noting the concern here that this analyst thinks USA may not be able to fully make up for a China loss if the trade war heats up. I think if the NVL systems are shipping in volume, it will not matter as China is primarily helping to make up for the lag in these systems right now for the next 1-2 quarters.  

Conclusion: 

You might be asking yourself — why is the I/O Fund so focused on something the rest of the market does not seem to care about? There are two reasons … $100 billion pointed at one SKU is unheard of. Consider the iPhone took a decade to get to that revenue. We will not lazily assume it’s coming until I get “all systems are a go” signs across the board. You can’t put $100 billion into production and ship in volume without a splash in the large supply chain that builds these AI systems. There was no splash (yet). 

Secondly, we need Nvidia to break out of the range bound price it’s been in for 9 months (between $110 and $150). While many might be saying “whew, Nvidia beat/raised,” my stance is “where’s the catalyst that’s going to take this thing higher?” I had an answer for you a few months back – it was the NVL systems, which I stated would cause “fireworks.” To be range bound trading between $110 and $150 since May of 2024 is not exactly fireworks, and thus we need to look closely at whether Nvidia’s next move is to break out or break down. As stated, by being range bound, the valuation has become more attractive, and we are watching this piece closely. This is my number one reason for seeing a breakout above $150 right now (valuation). 

While many investors will rightly hold Nvidia through ups/downs (you’ll see IOF hold for years to come), our firm is competing with the world’s best tech portfolios – which means complacency is not something you’ll see here. Our Members greatly benefit from our need to compete as we question everything – especially if we are overweight any specific outcome.  

Please reference the most up to date trading plan here.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in NVDA at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

• Nvidia Q4 Financials: Beat Likely for Q4; Questions Persist for Q1
• Q1 2025 Webinar Highlights
• TSMC Q4 2024 Earnings: Record Profit Led by Robust AI Demand
• TSMC Q4 2024 Earnings Preview: Revenue beat estimates

Compared to any other stock on Wall Street, Nvidia reported an exceptional quarter. Yet, Nvidia’s stock is competing with itself at this point, and when compared to previous Nvidia earnings reports, Q4 and Q1 represent a pause in the fireworks. 

Nvidia reported $11 billion in Blackwell revenue, however, Huang finally admitted the NVL systems are in production (i.e., not shipping in volume). Rather, other SKUs are making up Blackwell revenue for now. According to a discussion with an analyst, Nvidia foresees NVL systems and the next generation Blackwell Ultra ramping “simultaneously” — which increases the pressure to deliver this fiscal year given there was a “couple months” delay with the NVL systems.  

Fortunately, for the I/O Fund, we use technicals to reduce risk. When there is a change in story, even if it’s transitory by a quarter or two, we rely on technicals to protect our position while maximizing the upside. As you know, we are exposed to Nvidia — yet heavily exposed when you consider its ecosystem. 

We also hold our management teams accountable, and not even Jensen Huang should get a free pass. Investors should have been provided more transparency on when the premier SKU will be shipping in volume, since it was originally slated for Q1. Below, I outline the reasons that H2 is likely to be the catalyst for the next leg higher, whereas Q1 may not have been enough to cause the stock to break out. With that said, semiconductors see intra-quarter news more frequently than software peers, and thus, this could change anytime.  

Nvidia’s valuation remains very attractive. I stated on Fox yesterday that Nvidia and its suppliers are the best trade of the year – the question that remains is timing. If the NVL systems were shipping in volume, the supply chain would be on fire right now – is what I mean by timing. I also pointed out that investors do better when proxies participate – whether that’s suppliers providing a clear, green light or an ETF like SMH, which is 14% off ATHs. 

I look at this and more below! 

Revenue Beat/Raise (Again) 

Nvidia beat consensus estimates by just $1.15 billion this quarter, its smallest beat of the last seven quarters, as it reported revenue of $39.33 billion, up 77.9% YoY and 12.1% QoQ. Management reported that Blackwell was witnessing the fastest product ramp in company history, delivering $11 billion in Blackwell revenue in Q4. 

For FY25, Nvidia reported revenue growth of 114% YoY to $130.5 billion, marking a consecutive year of triple digit growth after revenue rose 126% YoY in FY24. 

For Q1, Nvidia guided for revenue of $43 billion, +/- 2%, representing growth of 65.1% YoY and 9.3% QoQ at midpoint, slightly ahead of estimates for 61.2% YoY growth to $42 billion. As we had noted in our pre-earnings analysis, some analysts were looking for as much as $47 billion in revenue in Q1. On a sequential basis, Q1 is also estimated to see QoQ growth dip to the single-digit range at the midpoint of guidance, slowing nearly 3 points from Q4.  

Margins to Improve H2 

Margins are expected to contract sequentially in Q1 as Blackwell ramps, with management having stated in Q3 that gross margins were expected to dip to the low-70% level as Blackwell begins to ramp before returning to the mid-70% range. 

Gross margins in Q4 were in-line with prior guidance, though operating margins came in ahead of guidance as Nvidia continued to benefit from strong operating leverage. 

• Q4 GAAP gross margin was 73%, contracting from 74.6% in Q3. For Q1, GAAP gross margin is expected to contract further to 70.6%.  
• Adjusted gross margin was 73.5% in Q4, down from 75% in Q3, with management guiding for another contraction to 71% in Q1. 
• Q4 GAAP operating margin was 61.1%, contracting from 62.3% in Q3. For Q1, GAAP operating margin is expected to drop below 60%, with management’s expense guidance implying a 58.5% margin.  
• Adjusted operating margin was 64.9% in Q4, down from 66.3% in Q3, with Q1 forecast to contract further to 62.6%. 
• Q4 GAAP net margin expanded slightly sequentially to 56.2%, though Q1’s net margin is implied to be 50.1% due to the QoQ gross and operating margin contractions. 

For FY25, margins expanded on a YoY basis despite contracting in the back half of the year. FY25’s GAAP gross margin was 75%, up from 72.7% in FY24. GAAP operating margin expanded 8.3 points YoY to 62.4%, as GAAP operating income increased 147% YoY to $81.5 billion. GAAP net margin increased 7 points YoY to 55.9% with a similar 134% YoY rise in net income to $86.8 billion. 

EPS 

Q4 GAAP EPS increased 82% YoY to $0.89, beating estimates for $0.80. Adjusted EPS of $0.89 beat estimates for $0.85. Growth is expected to moderate to the ~50% range in the coming quarters, likely pressured by falling margins due to Blackwell’s ramp. 

• Q1 adjusted EPS is expected to rise 49.4% YoY to $0.91. 
• Q2 adjusted EPS is expected to rise 50.2% YoY to $1.02. 

Cash Flows and Balance Sheet 

Operating and free cash flows both decreased slightly sequentially, with management explaining that this was due to a “a higher accounts receivable balance due to shipment linearity and increased inventory to support our Blackwell product ramp.” Both inventories and accounts receivables showed strong QoQ growth. 

• Operating cash flow in Q4 was $16.63 billion, down from $17.63 billion in Q3. OCF margin was 42.2%, more than 8 points lower than Q3’s 50.3% margin. FY25’s operating cash flow was $64.09 billion, rising 128% YoY and representing a margin of 49.1%, up 3 points YoY. 
• Free cash flow was $15.52 billion in Q4, down from $16.79 billion in Q3. FCF margin was 39.5% in Q4, down from 47.9% in Q3. For FY25, free cash flow rose 125% YoY to $60.72 billion, for a margin of 46.5%, up 2.3 points YoY. 
• Cash and marketable securities totaled $43.21 billion, while debt totaled $8.46 billion. 

Inventories, accounts receivable and purchase commitments all rose quite substantially on a sequential basis as Nvidia prepares to ramp Blackwell throughout the year. 

• Inventories rose nearly 32% QoQ to $10.08 billion, representing a sequential rise of $2.43 billion.  
• Accounts receivable rose $5.4 billion QoQ to $23.1 billion. 
• Purchase commitments and obligations for inventory and manufacturing capacity rose $1.9 billion QoQ to $30.8 billion. 

Key Segments 

Data Center 

Data center revenue rose 93% YoY and 16% QoQ to $35.58 billion in Q4, driven primarily by GPUs as networking revenue was soft. Compute revenue rose 116% YoY and 18% QoQ to $32.56 billion in Q4, though Networking revenue declined (9%) YoY and (3%) QoQ to $3.02 billion. 

Management noted that they “delivered $11.0 billion of Blackwell architecture revenue in the fourth quarter of fiscal 2025, the fastest product ramp in our company’s history,” driven by major CSPs which accounted for 50% of data center revenue. Q4 growth was also aided by sequential growth for the H200. 

For Networking, Nvidia said that it is “transitioning from small NVLink 8 with Infiniband to large NVLink 72 with Spectrum X,” with growth in Ethernet and NVLink products related to the Grace Blackwell ramp. 

For FY25, data center revenue rose 142% YoY to $115.2 billion, driven by a 162% YoY increase in Compute revenue to $102.2 billion, with Networking revenue rose just 51% YoY to $12.99 billion. 

Other Segments 

• Gaming revenue declined (11%) YoY and (22%) QoQ to $2.54 billion, due to “limited supply for both Blackwell and Ada GPUs.” For FY25, gaming revenue rose 9% YoY to $11.35 billion. 
• Automotive revenue rose 103% YoY and 27% QoQ to $570 million, driven by self-driving platform sales. For FY25, automotive revenue rose 55% YoY to $1.69 billion. 
• Pro Viz revenue rose 10% YoY and 5% QoQ to $511 million, driven by a “continued ramp of Ada RTX GPU workstations for use cases such as generative AI-powered design, simulation, and engineering.” For FY25, Pro Viz revenue rose 21% YoY to $1.88 billion. 
• OEM and other revenue rose 40% YoY and 30% QoQ to $126 million. For FY25, OEM and other revenue rose 27% to $389 million.

Earnings Call:

NVL 72 Systems and Blackwell Ultra 

Of the $200 billion in revenue expected this year, roughly $100 billion is expected to come from NVL systems which comes out to 30,000 to 35,000 racks at $3 million per rack. Given there is evidence of a delay, there was bound to be a question about this on the call. Overall, the answer helps to alleviate if the systems are ready yet (they have “ramped production” but not stated they were shipping in volume).  

The remaining issue is if both Blackwell’s NVL systems and Blackwell Ultra (the next generation of GPUs) can ramp "simultaneously” (which was not the original road map). Perhaps these two can successfully ramp simultaneously, but it’s also important to acknowledge this was not the original plan. Personally, I think the hiccup discussed below should be explained more as to when the systems will ship in volume, since it was originally expected to be Q1. Judging by analyst estimates, the October quarter will see higher QoQ growth in terms of revenue at $5 billion compared to analyst estimates of $4 billion for the previous quarter.  

Harlan Sur  

Good afternoon. Thanks for taking my question. Your next-generation Blackwell Ultra is set to launch in the second half of this year, in line with the team's annual product cadence. Jensen, can you help us understand the demand dynamics for Ultra given that you'll still be ramping the current generation Blackwell solutions? How do your customers and the supply chain also manage the simultaneous ramps of these two products? And — is the team still on track to execute Blackwell Ultra in the second half of this year? 

Jensen Huang  

Yes. Blackwell Ultra is second half. As you know, the first Blackwell was we had a hiccup that probably cost us a couple of months. We're fully recovered, of course. The team did an amazing job recovering and all of our supply chain partners and just so many people helped us recover at the speed of light. And so now we've successfully ramped production of Blackwell. 

But that doesn't stop the next train. The next train is on an annual rhythm and Blackwell Ultra with new networking, new memories and of course, new processors, and all of that is coming online. We've have been working with all of our partners and customers, laying this out. They have all of the necessary information, and we'll work with everybody to do the proper transition. This time between Blackwell and Blackwell Ultra, the system architecture is exactly the same. It's a lot harder going from Hopper to Blackwell because we went from an NVLink 8 system to a NVLink 72-based system. So the chassis, the architecture of the system, the hardware, the power delivery, all of that had to change. This was quite a challenging transition. 

But the next transition will slot right in Blackwell Ultra will slot right in. We've also already revealed and been working very closely with all of our partners on the click after that. And the click after that is called Vera Rubin and all of our partners are getting up to speed on the transition of that and so preparing for that transition. And again, we're going to provide a big, huge step-up. And so come to GTC, and I'll talk to you about Blackwell Ultra, Vera Rubin and then show you what we place after that. Really exciting new products, so to come to GTC piece. 

–End Quote 

The $11 billion is likely coming from other SKUs as we pointed out in our pre-earnings analysis “There is certainly a scenario where Nvidia’s GPUs are in such high demand that other SKUs can help make up for a delay on the much-larger GB200 NVL systems.” The additional evidence of this is the QoQ decline in networking as these systems would certainly drive QoQ growth in networking, making the clear readthrough that other SKUs are driving the $11 billion. 

When asked if there were bottle necks to consider with NVL 72 systems specifically, the CEO avoided discussing NVL72 systems and redirected to a more general discussion on the Grace Blackwell architecture. He also pointed toward single use cases that have “come online” rather than a “shipping in volume” discussion: “You've probably seen on the web, a fair number of celebrations about Grace Blackwell systems coming online and we have them, of course. We have a fairly large installation of Grace Blackwell goes for our own engineering and our own design teams and software teams. CoreWeave has now been quite public about the successful bring up of theirs. Microsoft has, of course, OpenAI has, and you're starting to see many come online. And so I think the answer to your question is nothing is easy about what we're doing, but we're doing great, and all of our partners are doing great.” 

TAKEAWAY: The NVL 72 systems are probably not shipping in volume right now, but should be soon (if they’re in production). This will run close to Blackwell Ultra’s launch. Demand will not be an issue rather it’s unusual to see two generations ship this close to one another, and it will require a smooth supply chain  

Custom Silicon Not a Threat for 4 Reasons 

Concerns around timing of shipping for Blackwell SKUs will be transitory yet concerns with custom silicon are here to stay. Since the very first day of covering the AI story in 2018, I have been fielding concerns around custom silicon as Google’s TPUs were all the rage in 2018. It was actually expected at the time that Google’s TPUs would transition to merchant sales and directly compete with Nvidia. Nearly seven years later, that has not materialized. 

Below, is how Jensen Huang describes the challenges around custom silicon. He points toward custom silicon being application specific whereas GPUs are more flexible (this part is key), the software layer, as well as the fact that a lot of custom silicon does not make it to full production. Because investors will be fielding this concern into the foreseeable future, I’ve noted the response and four reasons below: 

1. General versus application specific: “NVIDIA's architecture is general whether you're — you've optimized for unaggressive models or diffusion-based models or vision-based models or multimodal models or text models. We're great in all of it […] And so by definition, we're much, much more general than narrow” 
2. Nvidia is Everywhere: “So we're general, we're end-to-end, and we're everywhere. And because we're not in just one cloud, we're in every cloud, we could be on-prem. We could be in a robot. Our architecture is much more accessible and a great target initial target for anybody who's starting up a new company. And so we're everywhere.” 
3. Performance: “And if our performance per watt is anywhere from 2x to 4x to 8x, which is not unusual, it translates directly to revenues. And so if you have a 100-megawatt data center, if the performance or the throughput in that 100-megawatt or the gigawatt data center is 4 times or 8 times higher, your revenues for that gigawatt data center is 8 times higher.” 
4. What Nvidia Does is Hard – the Hardware and the Software is hard to replicate: “And the ecosystem that sits on top of our architecture is 10x more complex today than it was 2 years ago. And that's fairly obvious because the amount of software that the world is building on top of architecture is growing exponentially and AI is advancing very quickly. So bringing that whole ecosystem on top of multiple chips is hard.”

China Increases in Geo Mix for Q1 

An analyst pointed out that China will be increasing in geographic mix for Q1.  

Here is the concern from the analyst: “And I think there is a concern about whether U.S. can pick up the slack if there's regulations towards other geographies. And I was just wondering, as we go throughout the year, if this kind of surge in the U.S. continues and it's going to be — whether that's okay. And if that underlies your growth rate, how can you keep growing so fast with this mix shift towards the U.S.? Your guidance looks like China is probably up sequentially. So just wondering if you could go through that dynamic and maybe collect can weigh in.” 

This may be a moot issue, as management stated: “China is approximately the same percentage as Q4 and as previous quarters. It's about half of what it was before the export control. But it's approximately the same in percentage” but noting the concern here that this analyst thinks USA may not be able to fully make up for a China loss if the trade war heats up. I think if the NVL systems are shipping in volume, it will not matter as China is primarily helping to make up for the lag in these systems right now for the next 1-2 quarters.  

Conclusion: 

You might be asking yourself — why is the I/O Fund so focused on something the rest of the market does not seem to care about? There are two reasons … $100 billion pointed at one SKU is unheard of. Consider the iPhone took a decade to get to that revenue. We will not lazily assume it’s coming until I get “all systems are a go” signs across the board. You can’t put $100 billion into production and ship in volume without a splash in the large supply chain that builds these AI systems. There was no splash (yet). 

Secondly, we need Nvidia to break out of the range bound price it’s been in for 9 months (between $110 and $150). While many might be saying “whew, Nvidia beat/raised,” my stance is “where’s the catalyst that’s going to take this thing higher?” I had an answer for you a few months back – it was the NVL systems, which I stated would cause “fireworks.” To be range bound trading between $110 and $150 since May of 2024 is not exactly fireworks, and thus we need to look closely at whether Nvidia’s next move is to break out or break down. As stated, by being range bound, the valuation has become more attractive, and we are watching this piece closely. This is my number one reason for seeing a breakout above $150 right now (valuation). 

While many investors will rightly hold Nvidia through ups/downs (you’ll see IOF hold for years to come), our firm is competing with the world’s best tech portfolios – which means complacency is not something you’ll see here. Our Members greatly benefit from our need to compete as we question everything – especially if we are overweight any specific outcome.  

Please reference the most up to date trading plan here.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in NVDA at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

• Nvidia Q4 Financials: Beat Likely for Q4; Questions Persist for Q1
• Coinbase Posts Significant Growth Across the Board in Blowout Q4
• AI Hardware Suppliers Forecast Muted H1, Strong H2 — and What it Might Mean for Nvidia
• AMD Q4 Earnings: Q1 Decline in Data Center, Mgmt Drops AI Guidance

Nvidia will release its Q4 FY2025 results on 26th February after market close. Analysts expect Q4 revenue to grow 72.3% YoY to $38.1 billion and adjusted EPS to grow 63.8% YoY to $0.84. The company has a history of beating consensus estimates, at a minimum of $1 billion for six quarters.  

Questions persist as from the supplier stocks listed below, Super Micro lowered guidancefrom a range of $26 billion to $30 billion, down to $23.5 billion to $25 billion on February 13th. Semtech pulled its $50 million floor guidance for AI revenue. AOSL’s Q1 missed. Regarding Astera’s raise for Q1, they called out custom silicon as driving Q1 revenue rather than merchant GPUs. Vertiv gave mixed results that were a hair lower than previous full year organic sales growth (at 16% instead of 17%). TSMC lowered guidance due to an earthquake.  

With that said, analysts expect Super Micro revenue to grow 27% sequentially in Q2, which suggests more meaningful Blackwell revenue could begin to ramp in the June quarter. We will look for more information from Nvidia on Wed evening. 

Revenue 

Management guided Q4 revenue of $37.5 billion, representing YoY growth of 69.7% and 6.9% QoQ at midpoint. The Q4 growth is expected to be driven by continued demand for Hopper architecture and the initial ramp of Blackwell products. Management provided guidance during Q2 results to “ship several billions in Blackwell revenue” and provided an update during Q3 earnings call that “we are on track to exceed our previous Blackwell revenue estimate of several billion dollars as our visibility into supply continues to increase.” 

UBS analyst Timothy Arcuri expects Blackwell’s revenue of $9 billion in Q4. He said, "We now see Blackwell revenue at ~$9B in Jan Q (vs. ~$5B previously and supply chain capacity able to support as much as $14B) but we believe Hopper is down in Jan," Arcuri added. "Net, we remain at ~$42B for FQ4 (Jan) (Data Center ~$38B) with FQ1 (April) still ~$47B." 

• Q3 revenue grew by 93.6% YoY to $35.08 billion, driven by strong Hopper revenue. 
• Analysts expect Q4 revenue to be $38.1 billion, representing YoY growth of 72.3% and QoQ growth of 8.6% 
• Q1 revenue consensus is $41.98 billion, for YoY growth of 61.2% and QoQ growth of 10.2%.

Looking at sequential growth, Q4 would represent the slowest QoQ growth for two consecutive quarters since Hopper’s ramp, which is to be expected given the new generation of GPUs are scheduled to ramp in H1 2025. We expressed concerns about the timing of Blackwell ramping, primarily based on what suppliers were saying in their most recent earnings reports.

• Looking further out, analysts expect revenue to grow 51.7% YoY to $195.9 billion in FY2026 ending January 2026 and 21.4% YoY to $237.8 billion in FY2027.

Margins 

Margins are also expected to be a focus during the upcoming earnings, as the Hopper ramp helped the company to improve its bottom line. However, the gross margins will drop for a couple of quarters during the initial ramp of Blackwell to the low-70s and increase to the mid-70s when Blackwell is fully ramped in the second half of the calendar year 2025. This was further clarified in the Q3 earnings call Q&A. 

Q: Timothy Arcuri (Analyst)  

“[…] And then Colette, you kind of talked about Blackwell bringing down gross margin to the low-70s as it ramps. So I guess if April is the crossover, is that the worst of the pressure on gross margin? So you're going to be kind of in the low-70s as soon as April. I'm just wondering if you can sort of shape that for us. Thanks.”  

A: Colette Kress (CFO)  

Sure. Let me first start with your question, Tim. Thank you regarding our gross margins, and we discussed our gross margins as we are ramping Blackwell in the very beginning and the many different configurations, the many different chips that we are bringing to market, we are going to focus on making sure we have the best experience for our customers as they stand that up. We will start growing into our gross margins, but we do believe those will be in the low 70s in that first part of the ramp. So you're correct, as you look at the quarters following after that, we will start increasing our gross margins and we hope to get to the mid-70s quite quickly as part of that ramp.” 

Q: Vivek Arya (Analyst)  

“Thanks for taking my question. Colette, just to clarify, do you think it's a fair assumption to think NVIDIA could recover to kind of mid-70s gross margin in the back half of calendar 2025? Just wanted to clarify that.” 

A: Colette Kress (CFO)  

“Okay. Vivek, thank you for the question. Let me clarify your question regarding gross margins. Could we reach the mid-70s in the second half of next year? And yes, I think it is reasonable assumption or a goal for us to do, but we'll just have to see how that mix of ramp goes. But yes, it is definitely possible.” 

Q: Stacy Rasgon (Analyst)  

Hi, guys. Thanks for taking my questions. Colette, I had a clarification and a question for you. The clarification, just when you say low-70s gross margins, is 73.5 count as low-70s, or do you have something else in mind? 

Colette Kress (CFO)  

“So first starting on your first question there, Stacy, regarding our gross margin and defined low. Low, of course, is below the mid, and let's say we might be at 71%, maybe about 72%, 72.5%, we're going to be in that range. We could be higher than that as well. We're just going to have to see how it comes through. We do want to make sure that we are ramping and continuing that improvement, the improvement in terms of our yields, the improvement in terms of the product as we go through the rest of the year. So we'll get up to the mid-70s by that point.” 

–End Quote 

• Q3 gross margin was 74.6% compared to 74% in the same period last year. Management’s guide for Q4 is 73%. The adjusted gross margin was 75% in Q3 for both periods and the management guide for the next quarter is 73.5%. 
• Q3’s operating margin was 62.3% compared to 57.5% in the same period last year with a guide of 60.2% for Q4.  Adjusted gross margin was 66.3% compared to 63.8% in the same period last year and guide of 64.4% for Q4. 
• Q3's net margin was 55% compared to 51% in the same period last year and the guide for Q4 is 51.2%. Adjusted net margin was 57% in Q3 compared to 55.3% in the same period last year. 

EPS

Q3 GAAP EPS grew by 110% YoY to $0.78, and adjusted EPS grew by 101.5% YoY to $0.81, driven by strong operating leverage. Analysts expect strong growth in the coming quarters. However, growth is expected to moderate in line with the revenue growth. 

• Analysts expect Q4 adjusted EPS to grow 63.8% YoY to $0.84 and 49% YoY to $0.91 in Q1. 
• Looking further out, analysts expect adjusted EPS to grow 50.3% YoY to $4.44 in FY2026 and 26.1% YoY to $5.60 in FY2027.

Cash Flows and Balance Sheet 

Q3 cash flow remained strong, with operating and free cash flow margins both expanding sequentially and YoY. 

• Q3's operating cash flow margin was 50.3% compared to 40.5% in the same period last year. 
• Q3’s free cash flow margin was 47.9% compared to 38.9% in the same period last year.  
• Cash and marketable securities were $38.49 billion and debt of $8.46 billion compared to $34.8 billion and $8.46 billion at the end of Q2.  
• The company repurchased shares worth $11.0 billion and paid $245 million in dividends in Q3. 

Key Metrics 

Q3 data center revenue grew by 112% YoY and 17% QoQ to $30.77 billion, driven by strong Hopper revenue.  

According to estimates from FactSet, the data center is expected to increase $2.6 billion sequentially to $33.37 billion compared to the $4.5 billion increase in Q3, which would mark the lowest sequential increase since the AI boom at the beginning of 2023. UBS analyst Timothy Arcuri is more bullish and expects Data Center revenue to be $38 billion with Blackwell’s revenue of $9 billion in Q4.  

However, analysts are mixed with Mizuho’s Vijay Rakesh stating he is expecting a “more flattish” Q1 with data center revenue of $36.7 billion versus $37.4 billion consensus.  

On the other hand, KeyBanc analyst believes that despite the supply chain constraints for GB200 servers it will be backfilled with HGX-based B200 servers with x86 head nodes. The same note points toward H2 being more likely GB200s: “Baird believes previously discussed delays for GB200 have not been related to demand but to data enter availability while architecture novelties have taken time to implement and optimize. Investors should not assume that these initial delays will lead customers to skip to the next-generation products, the firm contends. It expects GB200 to represent the majority of Nvidia's GB mix in the second half of 2025 and into 2026.” The analyst believes GB200s will be offset by B200 servers including the HGX-based servers and H20 GPUs from China.

• Q3 gaming revenue increased 15% YoY and 14% QoQ to $3.28 billion, driven by GeForce RTX 40 Series and game console SoCs. Management expects gaming revenue to decline sequentially due to supply chain constraints.  
• Pro Viz revenue increased 17% YoY and 7% QoQ to $486 million, driven by the ramp up of RTX GPU workstations. 
• Automotive revenue increased 72% YoY and 30% QoQ to $449 million, driven by the ramp of Nvidia’s self-driving platform revenue. 
• OEM and other revenue increased 33% YoY and 10% QoQ to $97 million.  

Valuation 

The company is trading at a P/E ratio of 54.5 and a forward P/E ratio of 31.2. 

The P/S ratio is 30.4 compared to the average P/S ratio of 25, the forward P/S ratio is 17.3. These valuations are very reasonable and typically present a buying opportunity as the company has been rapidly growing its top and bottom line.

Technical Analysis 

By Knox Ridley 

Since Nvidia bottomed on October 13th 2022, we have seen three distinct uptrends emerge. We are in the 3rd of these uptrends, and it is markedly different than the prior two. For one, unlike the first two, the uptrend that started in August of 2024 is relatively weak with a messy and overlapping structure. The prior two were nearly vertical. The second notable difference is that volume is weakening the higher price goes into the current uptrend. This is not like the prior two uptrends that saw volume expand with price. This signals that there is less excitement about the current move higher, as less buyers are supporting it.

If we examine the potential pattern the current uptrend is taking, there are only two that make sense, given the price action.  Within the larger context of the uptrend, we are either setting up for the final 5th wave or a drop to complete the larger 4th wave.

If we zoom in, we can get a better idea of the levels to monitor that will signal what is likely playing out.

The Green Count – If this is a continuation of the larger uptrend, it is taking the form of an ending diagonal pattern. These patterns are the final swings in a larger 5 wave uptrend. They also tend to follow a powerful 3rd waves, which is what we saw with NVDA in 2024.  

Ending diagonals are also a 5 wave patterns that have significant overlaps and are relatively weak. If this is the pattern in play, we will need to hold over the $119 – $123 support zone and then break above the $144 – $149 resistance zone. If this does happen, we will be in the 5th wave of this ending diagonal, which will target between $165 – $211. This will end the 5th wave and should lead to a notable retrace. 

The Blue Count – Considering the messy and overlapping nature of this uptrend, there is a chance that this was a corrective bounce in an on-going correction that started in June of 2024. This would suggest that the B wave of this downtrend ended on January 7th with a double top. The final C wave drop should break below $123 – $119, and find support between $102 – $83.

Considering that Nvidia has been the market leader since 2023, and the most important name in the AI infrastructure cycle, how this stocks breaks will be very important to the bull market.

Conclusion: 

Nvidia has an attractive valuation and is one of the few tech stocks in the market that does. Typically, we would buy here. However, the I/O Fund prefers to wait to see how the supplier commentary around Blackwell resolves before deciding next steps since we are particularly exposed to AI semis.  

Our team has no doubt we will capture the next, powerful move higher in AI as we closely track key companies. However, given we our portfolio carries a higher beta profile, we tend to be more cautious on timing. With tech, you should not have to accept increased risk to buy – as the buys take care of themselves when a trend is in play and “all systems are a go.”  

If Nvidia does well on Wednesday – great, we are clearly participating with a heavy allocation to AI semis. If Nvidia stumbles with a Q1 outlook, then we are prepared for that too and will hedge our AI semis. That’s all you can ask for as an investor – is to have a plan! 

Lead Tech Analyst Beth Kindig and Equity Analyst Royston Roche contributed to this analysis.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in NVDA at the time of writing and may own stocks pictured in the charts.

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Nvidia will release its Q4 FY2025 results on 26th February after market close. Analysts expect Q4 revenue to grow 72.3% YoY to $38.1 billion and adjusted EPS to grow 63.8% YoY to $0.84. The company has a history of beating consensus estimates, at a minimum of $1 billion for six quarters.  

Questions persist as from the supplier stocks listed below, Super Micro lowered guidancefrom a range of $26 billion to $30 billion, down to $23.5 billion to $25 billion on February 13th. Semtech pulled its $50 million floor guidance for AI revenue. AOSL’s Q1 missed. Regarding Astera’s raise for Q1, they called out custom silicon as driving Q1 revenue rather than merchant GPUs. Vertiv gave mixed results that were a hair lower than previous full year organic sales growth (at 16% instead of 17%). TSMC lowered guidance due to an earthquake.  

With that said, analysts expect Super Micro revenue to grow 27% sequentially in Q2, which suggests more meaningful Blackwell revenue could begin to ramp in the June quarter. We will look for more information from Nvidia on Wed evening. 

Revenue 

Management guided Q4 revenue of $37.5 billion, representing YoY growth of 69.7% and 6.9% QoQ at midpoint. The Q4 growth is expected to be driven by continued demand for Hopper architecture and the initial ramp of Blackwell products. Management provided guidance during Q2 results to “ship several billions in Blackwell revenue” and provided an update during Q3 earnings call that “we are on track to exceed our previous Blackwell revenue estimate of several billion dollars as our visibility into supply continues to increase.” 

UBS analyst Timothy Arcuri expects Blackwell’s revenue of $9 billion in Q4. He said, "We now see Blackwell revenue at ~$9B in Jan Q (vs. ~$5B previously and supply chain capacity able to support as much as $14B) but we believe Hopper is down in Jan," Arcuri added. "Net, we remain at ~$42B for FQ4 (Jan) (Data Center ~$38B) with FQ1 (April) still ~$47B." 

• Q3 revenue grew by 93.6% YoY to $35.08 billion, driven by strong Hopper revenue. 
• Analysts expect Q4 revenue to be $38.1 billion, representing YoY growth of 72.3% and QoQ growth of 8.6% 
• Q1 revenue consensus is $41.98 billion, for YoY growth of 61.2% and QoQ growth of 10.2%.

Looking at sequential growth, Q4 would represent the slowest QoQ growth for two consecutive quarters since Hopper’s ramp, which is to be expected given the new generation of GPUs are scheduled to ramp in H1 2025. We expressed concerns about the timing of Blackwell ramping, primarily based on what suppliers were saying in their most recent earnings reports.

• Looking further out, analysts expect revenue to grow 51.7% YoY to $195.9 billion in FY2026 ending January 2026 and 21.4% YoY to $237.8 billion in FY2027.

Margins 

Margins are also expected to be a focus during the upcoming earnings, as the Hopper ramp helped the company to improve its bottom line. However, the gross margins will drop for a couple of quarters during the initial ramp of Blackwell to the low-70s and increase to the mid-70s when Blackwell is fully ramped in the second half of the calendar year 2025. This was further clarified in the Q3 earnings call Q&A. 

Q: Timothy Arcuri (Analyst)  

“[…] And then Colette, you kind of talked about Blackwell bringing down gross margin to the low-70s as it ramps. So I guess if April is the crossover, is that the worst of the pressure on gross margin? So you're going to be kind of in the low-70s as soon as April. I'm just wondering if you can sort of shape that for us. Thanks.”  

A: Colette Kress (CFO)  

Sure. Let me first start with your question, Tim. Thank you regarding our gross margins, and we discussed our gross margins as we are ramping Blackwell in the very beginning and the many different configurations, the many different chips that we are bringing to market, we are going to focus on making sure we have the best experience for our customers as they stand that up. We will start growing into our gross margins, but we do believe those will be in the low 70s in that first part of the ramp. So you're correct, as you look at the quarters following after that, we will start increasing our gross margins and we hope to get to the mid-70s quite quickly as part of that ramp.” 

Q: Vivek Arya (Analyst)  

“Thanks for taking my question. Colette, just to clarify, do you think it's a fair assumption to think NVIDIA could recover to kind of mid-70s gross margin in the back half of calendar 2025? Just wanted to clarify that.” 

A: Colette Kress (CFO)  

“Okay. Vivek, thank you for the question. Let me clarify your question regarding gross margins. Could we reach the mid-70s in the second half of next year? And yes, I think it is reasonable assumption or a goal for us to do, but we'll just have to see how that mix of ramp goes. But yes, it is definitely possible.” 

Q: Stacy Rasgon (Analyst)  

Hi, guys. Thanks for taking my questions. Colette, I had a clarification and a question for you. The clarification, just when you say low-70s gross margins, is 73.5 count as low-70s, or do you have something else in mind? 

Colette Kress (CFO)  

“So first starting on your first question there, Stacy, regarding our gross margin and defined low. Low, of course, is below the mid, and let's say we might be at 71%, maybe about 72%, 72.5%, we're going to be in that range. We could be higher than that as well. We're just going to have to see how it comes through. We do want to make sure that we are ramping and continuing that improvement, the improvement in terms of our yields, the improvement in terms of the product as we go through the rest of the year. So we'll get up to the mid-70s by that point.” 

–End Quote 

• Q3 gross margin was 74.6% compared to 74% in the same period last year. Management’s guide for Q4 is 73%. The adjusted gross margin was 75% in Q3 for both periods and the management guide for the next quarter is 73.5%. 
• Q3’s operating margin was 62.3% compared to 57.5% in the same period last year with a guide of 60.2% for Q4.  Adjusted gross margin was 66.3% compared to 63.8% in the same period last year and guide of 64.4% for Q4. 
• Q3's net margin was 55% compared to 51% in the same period last year and the guide for Q4 is 51.2%. Adjusted net margin was 57% in Q3 compared to 55.3% in the same period last year. 

EPS

Q3 GAAP EPS grew by 110% YoY to $0.78, and adjusted EPS grew by 101.5% YoY to $0.81, driven by strong operating leverage. Analysts expect strong growth in the coming quarters. However, growth is expected to moderate in line with the revenue growth. 

• Analysts expect Q4 adjusted EPS to grow 63.8% YoY to $0.84 and 49% YoY to $0.91 in Q1. 
• Looking further out, analysts expect adjusted EPS to grow 50.3% YoY to $4.44 in FY2026 and 26.1% YoY to $5.60 in FY2027.

Cash Flows and Balance Sheet 

Q3 cash flow remained strong, with operating and free cash flow margins both expanding sequentially and YoY. 

• Q3's operating cash flow margin was 50.3% compared to 40.5% in the same period last year. 
• Q3’s free cash flow margin was 47.9% compared to 38.9% in the same period last year.  
• Cash and marketable securities were $38.49 billion and debt of $8.46 billion compared to $34.8 billion and $8.46 billion at the end of Q2.  
• The company repurchased shares worth $11.0 billion and paid $245 million in dividends in Q3. 

Key Metrics 

Q3 data center revenue grew by 112% YoY and 17% QoQ to $30.77 billion, driven by strong Hopper revenue.  

According to estimates from FactSet, the data center is expected to increase $2.6 billion sequentially to $33.37 billion compared to the $4.5 billion increase in Q3, which would mark the lowest sequential increase since the AI boom at the beginning of 2023. UBS analyst Timothy Arcuri is more bullish and expects Data Center revenue to be $38 billion with Blackwell’s revenue of $9 billion in Q4.  

However, analysts are mixed with Mizuho’s Vijay Rakesh stating he is expecting a “more flattish” Q1 with data center revenue of $36.7 billion versus $37.4 billion consensus.  

On the other hand, KeyBanc analyst believes that despite the supply chain constraints for GB200 servers it will be backfilled with HGX-based B200 servers with x86 head nodes. The same note points toward H2 being more likely GB200s: “Baird believes previously discussed delays for GB200 have not been related to demand but to data enter availability while architecture novelties have taken time to implement and optimize. Investors should not assume that these initial delays will lead customers to skip to the next-generation products, the firm contends. It expects GB200 to represent the majority of Nvidia's GB mix in the second half of 2025 and into 2026.” The analyst believes GB200s will be offset by B200 servers including the HGX-based servers and H20 GPUs from China.

• Q3 gaming revenue increased 15% YoY and 14% QoQ to $3.28 billion, driven by GeForce RTX 40 Series and game console SoCs. Management expects gaming revenue to decline sequentially due to supply chain constraints.  
• Pro Viz revenue increased 17% YoY and 7% QoQ to $486 million, driven by the ramp up of RTX GPU workstations. 
• Automotive revenue increased 72% YoY and 30% QoQ to $449 million, driven by the ramp of Nvidia’s self-driving platform revenue. 
• OEM and other revenue increased 33% YoY and 10% QoQ to $97 million.  

Valuation 

The company is trading at a P/E ratio of 54.5 and a forward P/E ratio of 31.2. 

The P/S ratio is 30.4 compared to the average P/S ratio of 25, the forward P/S ratio is 17.3. These valuations are very reasonable and typically present a buying opportunity as the company has been rapidly growing its top and bottom line.

Technical Analysis 

By Knox Ridley 

Since Nvidia bottomed on October 13th 2022, we have seen three distinct uptrends emerge. We are in the 3rd of these uptrends, and it is markedly different than the prior two. For one, unlike the first two, the uptrend that started in August of 2024 is relatively weak with a messy and overlapping structure. The prior two were nearly vertical. The second notable difference is that volume is weakening the higher price goes into the current uptrend. This is not like the prior two uptrends that saw volume expand with price. This signals that there is less excitement about the current move higher, as less buyers are supporting it.

If we examine the potential pattern the current uptrend is taking, there are only two that make sense, given the price action.  Within the larger context of the uptrend, we are either setting up for the final 5th wave or a drop to complete the larger 4th wave.

If we zoom in, we can get a better idea of the levels to monitor that will signal what is likely playing out.

The Green Count – If this is a continuation of the larger uptrend, it is taking the form of an ending diagonal pattern. These patterns are the final swings in a larger 5 wave uptrend. They also tend to follow a powerful 3rd waves, which is what we saw with NVDA in 2024.  

Ending diagonals are also a 5 wave patterns that have significant overlaps and are relatively weak. If this is the pattern in play, we will need to hold over the $119 – $123 support zone and then break above the $144 – $149 resistance zone. If this does happen, we will be in the 5th wave of this ending diagonal, which will target between $165 – $211. This will end the 5th wave and should lead to a notable retrace. 

The Blue Count – Considering the messy and overlapping nature of this uptrend, there is a chance that this was a corrective bounce in an on-going correction that started in June of 2024. This would suggest that the B wave of this downtrend ended on January 7th with a double top. The final C wave drop should break below $123 – $119, and find support between $102 – $83.

Considering that Nvidia has been the market leader since 2023, and the most important name in the AI infrastructure cycle, how this stocks breaks will be very important to the bull market.

Conclusion: 

Nvidia has an attractive valuation and is one of the few tech stocks in the market that does. Typically, we would buy here. However, the I/O Fund prefers to wait to see how the supplier commentary around Blackwell resolves before deciding next steps since we are particularly exposed to AI semis.  

Our team has no doubt we will capture the next, powerful move higher in AI as we closely track key companies. However, given we our portfolio carries a higher beta profile, we tend to be more cautious on timing. With tech, you should not have to accept increased risk to buy – as the buys take care of themselves when a trend is in play and “all systems are a go.”  

If Nvidia does well on Wednesday – great, we are clearly participating with a heavy allocation to AI semis. If Nvidia stumbles with a Q1 outlook, then we are prepared for that too and will hedge our AI semis. That’s all you can ask for as an investor – is to have a plan! 

Lead Tech Analyst Beth Kindig and Equity Analyst Royston Roche contributed to this analysis.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in NVDA at the time of writing and may own stocks pictured in the charts.

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AppLovin delivered solid top and bottom line beat in its Q4 2024 earnings release. The company posted 44% YoY and 14.4% QoQ revenue growth to $1.37 billion, beating consensus estimates by 8.7%. GAAP EPS grew for the eighth consecutive quarter, coming in at $1.73, beating consensus estimates by 37.5%. Gross margins were at 76.7%. The Company also raised its forecasts for Q1 2025 and announced an agreement to sell its Apps segment for $900 million in Q1 2025.

The market rewarded its performance with a 24% stock rally. AppLovin has the unique advantage of having a vast dataset of 1.4 billion mobile users. The company has successfully leveraged this data to fuel its AI engine, enabling it to navigate and capitalize on the broader mobile gaming market effectively. AppLovin's data advantage provides a significant competitive edge over its competitors. Very few companies outside of Big Tech possess such a crucial dataset for advertising purposes. This strong moat solidifies the company's future position in the ad-tech industry.

The ad engine AXON 2.0 offers a monumental advantage to AppLovin as the company is ahead in the race for AI-driven advertising. AppLovin is also an arbitrage advertising platform, which means they can quantify the impact of their reach for advertisers by returning back to the advertiser what was spent or more within 30 days. If an advertiser spends $10,000 (or multiples of this), AppLovin is able to return that or more to the advertiser. The company is also unique in that it offers performance marketing for brands and direct-to-consumer. The Trade Desk primarily works with agencies, whereas AppLovin is attracting smaller and medium sized businesses that rely on performance. Most importantly, AXON 2.0 is an AI-powered advertising engine that is continuously improving. Every quarter and every year, AXON becomes more effective by ingesting more data that improves the model through self-learning.

Incidentally, The Trade Desk reported Q4 2024 EPS of 59 cents, beating consensus estimates by 2 cents; while revenues grew 22.32% YoY to $741.01 million, they still missed consensus estimates by $18.55 million. They issued Q1 revenue guidance of at least $575 million versus $574.16 million with an adjusted EBITDA of around $145 million. The stock gapped down 29%.

Revenue Reach Record Highs in Q4

Q4 revenue grew by 44% YoY and 14.4% QoQ to $1.37 billion, compared to Q3 revenue growth of 38.64% YoY and 10.93% QoQ to $1.198 billion. Q4 revenue of $1.37 billion beat consensus estimates for $1.26 billion by 8.7%, compared to Q3 revenue of $1.98 billion, beating consensus estimates for $1.13 billion by 5.9%.

The Advertising segment revenues grew 73% YoY to $999.49 million, up 73% YoY. The Apps segment revenues fell (1%) YoY to $373,29 million. Revenue strength was attributed to positive early results for its e-commerce advertisers during the holiday season, in addition to its mobile gaming partners. The Company signed an agreement to sell its Apps division to an undisclosed party for $900 million, comprised of $500 million in cash and a minority stake in the combined private entity.

Management Q1 2025 guide is $1.355 billion to $1.385 billion, representing a YoY growth of 29.5% and flat QoQ, beating estimates by 3.8% at the midpoint of $1.365 billion. The Advertising revenue Q1 guide is $1.03 to $1.05 billion, midpoint at $1.04 billion and the Apps revenue is $325 to $335 million, midpoint at $330 million.

Margins Consistently Expand Through 2024

Q4 gross margin was 76.7%, slightly down from Q3 at 77.5%, while operating margin was 44.3%, slightly down from Q3 at 44.6%.

Its Advertising segment generated a 78% adjusted EBITDA margin from the adjusted EBITDA of $776.7 million on $999.49 million in revenue. Its App segment generated a 19% adjusted EBITDA margin from the $71.3 million of adjusted EBITDA on $373.3 million in revenue. Even though the revenue will come down by divesting the Apps business, the adjusted EBITDA margin of the company is expected to increase to a high 70% from the current low 60% as the Apps business was a drag on the margins.

Management guided Q1 2025 adjusted EBITDA between 63% to 64%, midpoint of 63.5%, or adjusted EBITDA of $855 million to $885 million, midpoint of $870 million.

GAAP EPS Rises for the Eighth Consecutive Quarter

Q4 GAAP EPS was $1.73, beating consensus estimates for $1.26 by $0.47 or 37.5%. An improvement from Q3 EPS of $1.26, beating $0.93 consensus estimates of $0.93 by $0.32 or 34.8%. GAAP EPS has been improving consecutively from a loss of ($0.22) in Q4 2022 to $1.73 in Q4 2024.

Management didn’t provide specific guidance for Q1 2025 EPS. However, they did provide Q1 2025 adjusted EBITDA guidance of $855 to $885 million, midpoint at $870 million, which also include Advertising adjusted EBITDA of $805 to $825 million, midpoint at $815 million and Apps adjusted EBITDA of $50 to $60 million, midpoint at $55 million.

Steady Cash Flow Improvement, But Debt Remains Stagnant  

Operating cash flow has been improving for five consecutive quarters, reaching its highest level in Q4 at $701 million. The same can be said about free cash flow, as it has also improved for five consecutive quarters, reaching a high of $695.16 million in Q4. The accompanying OCF and FCF percentage have also continued to improve in parallel fashion closing Q4 at their highest levels of 51.10% and 50.60%, respectively. However, the debt has grown from $3.1 billion to $3.51 billion in Q4 and has remained stagnant for the past year. The sale of its Apps segment is expected to bring in $500 million in cash, which could be used to pay down some debt.

AppLovin’s debt levels have only grown in the past year to $3.51 billion, and it doesn't seem the company is very concerned about the debt-to-equity ratio of 3.74, whereas The Trade Desk has no debt.

The Apps Segment Will be Sold in Q1 2025

Applovin collects revenues from its Advertising segment, formerly known as the Software Platform revenue, and its Apps segment, which will be sold in Q1 2025. The Advertising segment revenue growth has been stabilizing with 73% YoY growth in Q4. The Apps segment revenue has been falling to (1%) YoY in Q4. Management guided Q1 2025 Advertising revenue growth to 53% and Apps revenue to fall (13%) YoY.

Valuation

Applovin trades at a price/earnings (P/E) ratio of 155.15.
Its forward price-earnings (P/E) of 69.55.
The price/sales (P/S) ratio is 41.49, forward P/S is 30.24.
The company is trading at an EV/EBITDA ratio of 69.6 and a forward EV/EBITDA ratio of 41.7.
However, if we assume a 78% adjusted EBITDA margin after divesting the Apps business, the forward EV/EBITDA will drop to about 35.9.
Debt-to-equity ratio 3.74.
APP stock is up 24% after earnings.

Since AppLovin plans to transform itself into a pure Advertising platform, it may be helpful to see how the leading pure play AdTech platform fares for comparison.

The Trade Desk trades at a price/earnings (P/E) ratio of 135.57.
Its forward price-earnings (P/E) of 42.26.
The price/sales (P/S) ratio is 17.91, forward P/S is 33.61.
Debt-to-equity ratio 0, no-debt.
TTD stock is down (33%) after earnings.

Earnings Call:

AppLovin Moves Beyond Gaming to E-commerce and Beyond

Q4 was the most foundational period since the Axon upgrade in 2023. For the first time, the Company captured “meaningful” holiday shopping advertising dollars beyond solely the gaming category, e-commerce. E-commerce is their new growth driver category. This is bullish as it increases the addressable market.

Applovin reaches over 1 billion people engaged with mobile games daily with engagement times comparable to social media. Applovin transcended beyond advertising for other games as they did historically, but this time included a broader set of advertisers. Applovin's data shows its platform works for all advertisers, not just direct-to-consumer (DTC) brands, which opens up its customer base to the 10 million businesses that advertise online.

The self-service platform is a top priority to meet the overwhelming demand.

“Self-serve and automated tools are going to be really, really helpful. And so, if you look at just the numbers, what gets us really excited is, in a limited pilot of a few customers on the platform, we're driving actually interesting revenue from this category. So, as we start opening up, we think it's going to be really impactful to the businesses of our clients. It's also very, very impactful for the publishers that we work with. All this inventory is mobile games, and it adds variety to the advertising that the customer is getting on a mobile game.”

Divesting the Gaming Apps Business

Applovin will be selling its Apps division for $900 million, comprised of $500 million in cash and a minority equity stake in the combined private company. They did not disclose the name of the acquirer but expect the transaction to close in Q1 2025.

The Apps segment owns over 200 free-to-play games operated by 10 in-house game studios. It will be instrumental in helping them sell their in-game advertising and collect user data. However, they’ve never been a game developer “at heart”. While their games are “free-to-play”, revenue is generated from in-app purchases including virtual items, upgrades and other enhancements. Advertisers bought ads in their gaming apps. Applovin generated $373.3 million from its Apps in Q4 and $1.485 billion in 2024. The Apps segment may be part of the aggregate system that helps the Advertising segment generate its double-digit revenue growth.

They will lose the Apps portion of revenue, which was not a growth engine. Apps revenue dropped (1%) YoY in Q4 and only grew 3% in 2024. While Apps revenue generated nearly 40% of total revenue in Q4 2023, its portion fell to 27% by Q4 2024, as its Advertising revenue soared 73% while Apps revenue lost (1%). Its Apps revenue generated 44% of total revenue in 2023, but due to the 75% YoY growth it ins Advertising revenue versus 3% growth in Apps revenue, that percentage fell to 31.5%.

The new metric moving forward will be adjusted EBITDA per employee (AEPE) as it transitions to a full advertising platform. Q4 generated a $3 million run-rate adjusted per employee, AEPE, in its Advertising segment.

More on the E-commerce Opportunity:

Foroughi stated that his focus has been on streamlining the team and processes. He stated that Applovin is “one of the most financially lucrative businesses to be constantly announcing layoffs.”

Foroughi notes many high-engagement gaming apps that earn most of their revenue through in-app purchases don’t typically run ads—since doing so could hurt their primary revenue stream—but companies like King have shown that introducing non-gaming ads can create extra revenue.

He notes that the traditional mobile gaming ad market has mostly focused on promoting competing games. By bringing in more non-gaming advertisers, the company expects to sell its MAX product and DSP platform to gaming publishers that primarily rely on in-app purchases, thereby opening a new growth opportunity.

“Traditionally, in the mobile gaming mediation market, vast, vast majority of the ads were for games that were competitive to the publisher game. As we execute on bringing on more and more advertisers in non-gaming categories, we think that it's going to be pretty reasonable to sell the MAX product and our DSP platform to these gaming publishers who are monetizing predominantly or exclusively with in-app purchasing, bring on that supply, and that will create another expansion vector.”

When asked about the growth of the e-commerce segment opportunity in 2025 and potential incremental growth to expect from its contribution, Stumpf felt very confident in the ability to contribute a material portion of the revenue from e-commerce activity in 2025.

Foroughi replied, “And the other piece is we've always been a closed-managed platform specifically for mobile games. We now have a lot of proof of life in ecommerce, you've seen it on Twitter, a lot of the noise from customers that are in, but we have not let a lot of customers onto the platform yet as we've been on pilot. As we go more and more open and start attracting thousands and tens of thousands, hundreds of thousands of customers to come on over the coming quarters and years, the business is going to continue to show compelling growth.” He summed it up, “We look at it as one single business and better monetizing the 1 billion-plus daily actives that we see. We don't think about it as revenue from each category matters.”

When asked about the e-commerce solution offering rollout, whether AppLovin is seeing and response from the incumbent competitors.

Foroughi replied, “Yeah. So, I mean, look, we don't look at competition all that much. What I will say is that we're not a platform that's taking the same dollars away from someone else. So, let's compare it to social. If you've got a mattress manufacturer advertising on social today and driving a certain amount of business, and they come on to our platform, what they're seeing are new transactions from customers that they wouldn't have otherwise gotten to respond to their ads. Whether those customers were on social or not might be an issue, but, certainly, there's a lot of overlap. But a lot of customers just won't notice ads in one environment. Now, in our environment, we have a full-screen video ad that captures attention, and they come on to our platform and they're driving incremental sales.”

As e-commerce grows to become a larger portion of revenues, it will be subject to typical seasonality, with holiday periods seeing slightly larger periods of revenue.

When asked about the Apps business sale and whether it would be tranched out rolling off a few studios throughout the year, CFO Stumpf was direct in his response.

“So, we're going to be selling the entirety of the Apps business, Arsenije. So that would all come off of the P&L and the balance sheet all at once. And then timing, as I mentioned, I think, in my talk track that we're targeting for that to close within Q2.”

When asked if the gaming companies are providing any feedback as they move into e-commerce ads, Foroughi responded that the gaming companies are seeing better performance on their platform every quarter since they are a catalyst to their growth. Also, shifting more impressions to e-commerce has its benefits.

“When they start seeing more and more of their impressions shifting to e-commerce, they absolutely love it. If you're a game publisher, your worst nightmare would have been that I'm going to monetize my game with all of my competition's ads. That just sucks as an end product, but that's all they had. And so, we allow all of our MAX publishers to see the advertising list run. Some of those publishers have commented about the number of impressions that are shifting to non-gaming categories. When you see that commentary, they're absolutely excited about it.”

Conclusion:

AppLovin has found a solid niche with in-game advertising due to its own ecosystem of over 200 gaming apps and solid AI engines. Its new e-commerce advertising segment is off to a strong start and looking to be a potentially lucrative source of more advertising revenues. Notably, the Company doesn’t report how much those revenues were in Q4 or will be moving forward. The rollout of its self-service platform will be a key catalyst once it's released. AppLovin also has high hopes of entering the lucrative CTV segment.

AppLovin’s success has been entirely based on gaming companies advertising to mobile gamers.

The company is planning to introduce new advertising segments to the 1.4 billion users they serve in 2025, which is likely to help the company grow into the foreseeable future. The catalyst for 2025 is expected to broaden to also include a self-service platform for all types of web-based advertising.

AXON 2.0 is an AI-powered advertising engine that is continuously improving. Every quarter and every year, AXON becomes more effective by ingesting more data that improves the model through self-learning. The management has been quite clear they believe these step-ups in model efficiency can help to maintain a 20% to 30% growth rate in gaming alone, and not accounting for the new web-based advertising catalysts expected in 2025.

The I/O Fund is actively looking for an entry into this stock with a final, multi-year price target that is multiples higher than where it’s trading today. It’s normal for an investor to feel like they’ve missed out; we think that thought will be a distant memory in a few years’ time. Keep an eye on your trade alerts and watch our Thursday webinar replay where Knox recently covered the plan for adding AppLovin to the portfolio.

Jea Yu, Equity Analyst at the I/O Fund, contributed to this article.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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Coinbase’s Q4 report was a blowout, with revenue beating estimates by more than 23% as transaction revenue and trading volumes both rose high triple-digits on a QoQ and YoY basis in the quarter. EPS of $4.68 came in more than 100% above estimates, with Coinbase benefiting partially from gains on crypto asset holdings and higher prices, while adjusted EBITDA and operating income generation were strong.

Management discussed share gains as a growth driver, as trading volume growth significantly outpaced spot market growth on a sequential basis, by as much as 50 points for consumer trading volumes. Transaction revenue growing at a higher rate than trading volumes for both consumer and institutional segments highlighted improvements in monetization, fueled by diversification in revenue streams to stablecoins, financing and subscriptions, and more.

Revenue

Coinbase reported a rather large revenue beat in Q4, following in Robinhood’s footsteps with strong growth in consumer transaction revenues in the quarter. Revenue increased 138.2% YoY and 88.5% QoQ to $2.27 billion, well ahead of estimates for $1.84 billion. The revenue outperformance was driven by significant triple-digit sequential growth in trading volumes, fueled by elevated crypto trading activity and a 27% sequential uptick in volatility as Bitcoin chopped around the $100K mark.

Management also said that they had “reached an all-time high for both U.S. spot and global derivatives market share in Q4,” with contributions from derivatives trading appearing in transaction revenue.

Q4’s strength was a stark contrast to Q3 for the spot market, which rebounded substantially in the quarter. In Q3, the US spot market had declined (18%) QoQ, but in Q4, the US spot market increased 126% QoQ.

For 2024, Coinbase reported $6.56 billion in revenue, up 111.2% YoY, driven by a strong Q1 and Q4. This was fueled by 148% YoY growth in trading volume to $1.2 trillion, with positive macro factors in the approval of Bitcoin ETFs in Q1 and the election of a pro-crypto administration in Q4.

Looking ahead, growth is expected to be in the mid-thirty percent rage for 1H, a substantial revenue from 1.5% and 16.3% estimated prior to the report. Trading volumes are already up significantly on a YoY basis YTD (discussed further below in Q1 Outlook). As a reminder to what we’ve stated in our deep dive from September, it’s nearly impossible to predict quarterly revenue this far in advance as asset volatility and trading volumes can be unpredictable. Recall from our post-Q3 write-up that Q4’s original grow estimate was 100 points lower at 38.9% YoY.

Key Metrics

Trading Volume

Trading volume grew significantly in the quarter, with both consumer and institutional trading volume outpacing spot market growth of 126% QoQ. Q4’s trading volume rose 137% QoQ and 185% YoY to $439 billion, the highest growth rate of the year and accelerating from 143% YoY in Q3. Interestingly, Bitcoin’s share of trading volume declined from 37% in Q3 to 27% in Q4, with other assets gaining 15 points share to 48%.

For 2024, trading volume rose 148% YoY to $1.16 trillion, still well below 2021’s peak of $1.67 trillion.

Consumer trading volume surged 224% YoY and 176% QoQ to $94 billion, outpacing spot market growth by 50 points. What’s notable is that consumer trading volumes are still well below 2021’s peaks despite Bitcoin surpassing $100,000 – consumer trading volume is under half of what it was in Q4 2021.

Institutional trading volume grew 176% YoY and 128% QoQ to $345 billion, rebounding from a string of sequential declines after Q1 this year. Institutional volumes nearly surpassed its prior record of $371 billion, coming in just 7% below that mark.

Transaction Revenue

This strong trading volume growth translated into strong transaction revenue growth; Q4’s transaction revenue 194% YoY and 172% QoQ to $1.56 billion. Despite accounting for a fraction of volume, consumer transaction revenue is the primary revenue driver, growing of 187% YoY and 179% QoQ to $1.35 billion. Institutional transaction revenue surged 285% YoY and 156% QoQ to $141.3 million – Coinbase provided a few factors that fueled this growth, discussed below.

For 2024, transaction revenue increased more than 162% YoY to $3.99 billion. Consumer transaction revenue rose 157% YoY to $3.43 billion, while institutional transaction revenue increased 283% YoY to $346 billion. Base and other transaction revenue rose 121% YoY to $210 million – Coinbase provided some strong stats for Base, with platform assets rising 89% YoY to $1.4 billion for 2024 and $25 billion in stablecoin transaction volume in Q4.

Consumer transaction revenue was 38% below Q4 2021’s peak above $2 billion, faring better than volume at 47% below peak. Consumer revenue also benefitted from a notably strong uptick in monthly transacting users (MTUs), which rose 24% QoQ to 9.7 million (still below Q4 21’s peak at 11.2 million) as Coinbase worked to improve trading experiences on the platform and added 13 new assets including “popular memecoins like PEPE and WIF” in Q4.

Interestingly, Coinbase noted that “nearly half of trading customers in Q4 were either new to Coinbase or resurrected from prior cycles.” While not a true driver of revenue, it’s a positive sign to see re-engagement of old customers and substantial new customer additions that can be monetized.

Despite being below peak volume, institutional transaction revenue reached a new peak at $141.3 million. This was nearly 56% higher than in Q4 when trading volume peaked, as Coinbase is benefiting from Prime and new products like derivates.

Management noted that they are seeing “significant momentum” in the institutional business, including “strong adoption of our Prime suite across custody, prime trading, financing, and staking, with top clients engaging with most of these products in 2024,” adding that “Prime Financing saw all-time high loan balances in Q4 [with] elevated client trading activity among customers who use financing.”

A quick note on Base (which we covered in our deep dive here): Coinbase saw “higher revenue per transaction due to increased network demand and higher ETH prices in Q4,” along with sequential growth in transactions. Cost per transaction remained below the $0.01 target, and Coinbase noted a goal to optimize this further in 2025.

Subscription and Services Revenue

Subscription and Services revenue was $641.1 million in Q4, more than 10.5% higher than the upper end of the $505 to $580 million guide provided last quarter. This reflected growth of 15% QoQ and nearly 71% YoY.

For 2024, Subscription and Services revenue grew 64% YoY to $2.31 billion, and notably “was ~4.5x higher compared to levels during the 2021 bull market.” The majority of 2024’s growth was driven by blockchain rewards with revenue more than doubling, stablecoins, and Coinbase One subscriptions.

For Q1, Coinbase guided for Subscription and Services revenue to be between $685 million to $765 million, for approximately 42% YoY growth and 13% QoQ at midpoint. This would be a nearly 30 point deceleration, though for reference, Q4 was originally guided to see 45% YoY growth.

Coinbase said the sequential growth in Q1 would be driven primarily by stablecoin revenue as USDC assets and market cap reached all-time highs in February, “continued growth in our Coinbase One subscriber base, and the higher average crypto asset prices so far in Q1.”

Within subscription and services revenue:

• Stablecoin revenue rose nearly 32% YoY but declined approximately (9%) QoQ to $225.9 million in Q4, driven by USDC growth, with international exchange customer balances more than doubling QoQ (settled in USDC).  For 2024, stablecoin revenue rose 31% YoY to $910 million. Coinbase noted that it facilitated more than $12 billion in on-chain payments in USDC, up 225% YoY. The segment has shown impressive growth, reaching nearly $1 billion in revenue in just two years.
• Blockchain rewards revenue grew 126% YoY and 39% QoQ to $214.9 million in Q4, driven by “higher crypto asset prices, increases in average protocol reward rates (notably SOL), and continued native unit inflows.” For 2024, blockchain rewards revenue increased 113% YoY to $706 million.
• Interest and finance fee income rose 34% YoY and 3% QoQ to $64.7 million in Q4, driven by Prime Financing, which saw all-time highs for loan balances after the election. For 2024, interest and finance fee income grew more than 42% YoY to $266 million.
• Custodial fee revenue rose nearly 119% YoY and 36% QoQ to $43.1 million in Q4, fueled by higher crypto prices and growth in native units under custody. Coinbase noted that “BTC inflows were the largest driver of native unit growth, driven by our role as primary custodian for the vast majority of ETFs.” For 2024, custodial fee revenue rose 103% YoY to $142 million.
• Other subscription and service revenue increased 46% YoY and 56% QoQ to $91.4 million, driven primarily by Coinbase One, with subscriber growth each quarter, accelerating in Q4. One subscribers surpassed 600,000 in Q4, marking 50% growth from Q1. For 2024, other subscription and service revenue rose nearly 125% YoY to $283 million.

Margins

Operating margin showed strong growth on both a sequential and YoY basis, up more than 31 points from last quarter and 33 points from last Q4 to 45.5%. Operating margin nearly matched Q1’s level at 46.4%.

Net margin was 56.8% in Q4 as Coinbase reported $1.29 billion in net income, impacted by “$476 million in pre-tax gains on our crypto asset investment portfolio, the vast majority of which were unrealized.” Pre-tax gains were $357 million when reflecting tax impacts. This was a significant QoQ increase from a 6.3% net margin in Q3, and nearly double Q4 2023’s net margin of 28.9%.

Stock-based compensation was $222 million, or 9.8% of revenue, declining (11%) QoQ. For Q1, Coinbase guided for SBC to be approximately $206 million.

EPS and Adjusted EBITDA

Coinbase places an emphasis on adjusted EBITDA due to crypto asset holdings, reporting its highest adjusted EBITDA quarter of the year in Q4 at $1.29 billion versus $1.01 billion in Q1. Adjusted EBITDA margin was 56.8% in Q4, up from 37.2% in Q3 but down from 61.9% in Q1 due to higher revenue.

For 2024, adjusted EBITDA was $3.35 billion in 2024, rising more than 242% YoY. Adjusted EBITDA margin expanded from 31.5% in 2023 to 51.0% in 2024.

Coinbase posted a rather huge EPS beat in Q4, with diluted GAAP EPS of $4.68 coming in at more than double the $2.04 estimate. This also surpassed the $4.40 in GAAP EPS that Coinbase generated in Q1. One primary takeaway here is that strong spot market conditions and elevated volatility are exponentially beneficial to Coinbase’s earnings generation and growth – Q1 and Q4 accounted for nearly 96% of 2024’s EPS generation.

Cash and Balance Sheet

Operating cash flow remained strong in Q4, rising more than 38% QoQ to $964.6 million. This also marked substantial growth from negative operating cash flow of ($5.2 million) in the year ago quarter. OCF margin was 42.5% in Q4. For 2024, operating cash flow rose 169% YoY to $2.56 billion, with OCF margin expanding from 29.7% to 39.0%.

Cash and equivalents totaled $8.54 billion, while debt remained steady at $4.23 billion. Coinbase is continuing to grow its cash reserves at a quick rate – cash is up almost 11% QoQ and 66% YoY, from $5.14 billion in Q4 2023.

This is quite different than Robinhood, where cash reserves have been flat at $5.1 billion since Q2 2024, and down from $5.3 billion a year ago. Cash and equivalents account for approximately 20% of Robinhood’s total assets, versus 38% for Coinbase.

Q1 Outlook

Coinbase provided a snapshot of transaction revenue for Q1 to date, noting that through February 11, transaction revenue was approximately $750 million. Coinbase cautions not to extrapolate this for the quarter as volatility and asset prices could change on a whim and quickly alter the path of revenue generation, but data from The Block supports a strong quarter of growth, with Coinbase gaining some share.

Monthly exchange volume was estimated to decline approximately (21%) MoM to $2.32 trillion in January, with Coinbase’s volume estimated to decline just (17%) MoM to $159 billion. Through February 14, Coinbase is estimated to have seen trading volume of $64.5 billion, with total exchange volume at $943 billion.

As a percentage of monthly exchange volume, Coinbase’s share rose from 6.5% in December to nearly 6.9% in January and 6.8% in February; both this and the relative outperformance on volume support management’s commentary that they are gaining share.

So far, halfway through Q1, Coinbase’s trading volume is at nearly $224 billion, versus Q1 2024’s $256 billion. Volumes so far are keeping pace with Q4, though this could change quickly.

Earnings Call Q&A

Management discussed the longer-term vision for crypto to fully evolve into an asset with significant daily usage across the world. CEO Brian Armstrong explained Coinbase thinks “crypto is much, much more than just an asset class that people want to trade. There's going to be daily use cases for everybody in the world as crypto updates the global financial system,” touching upon some opportunities in payments and tokenizing securities.

Stablecoin Growth, Revenue Diversification and USDC

Coinbase noted that it diversified its revenue streams during Q4, with growth in derivatives, stablecoins, USDC, staking and other products.

Management shared some interesting stats on stablecoins in the Q&A portion of the call, saying that “there was $30 trillion of crypto stablecoin volume last year. That was up 3x year over year.” CEO Brian Armstrong discussed that for stablecoins, Coinbase believes it can fuel more growth “just driving more partnerships with global and local players like Stripe and Yellow Card to do more global adoption. We've been adding a number of additional stable coin trading pairs on our platform. We've been offering rewards to our customers when they hold USDC,” and these efforts have helped drive stablecoin adoption and revenue in 2024.

Management sees stablecoin payments as a large opportunity in the future, saying that “we're moving with haste to integrate crypto payments across our entire suite of products. We think that'll be a big business over time.”

For USDC, management explained that they “have a stretch goal to make USDC the number one dollar stablecoin,” as it “has a network effect behind it” and could be “really defensible long term. So we'll be accelerating the market cap growth of USDC with more partnerships and leaning into new use cases like adding payment support across our product suite.”

International revenue is improving as well, with management explaining that “international revenue share reached 19% in Q4. And this is due to improved payment rails and localization. We've got a repeatable playbook now that we can launch in these new markets and get them to contribution margin positive. And so we're going to keep doing that in more markets.”

Derivatives Growth

Given that management pointed out that global derivatives reached an all-time high in Q4, they fielded questions about take rates long-term:

Q: Devin Ryan, Citizens JPM: A question on international derivatives. Obviously, just gaining kind of massive traction there and another great quarter of growth. Seems like the fees there are quite a bit lower, obviously. And so also appreciate that might make sense as you're taking share at this type of rate. But I'm curious as you think about take rates in derivatives kind of longer term, should we expect that they would kind of hold the line with where they are now? Or could there be an opportunity to actually increase the take rates as you get to kind of a more mature share?

A: Alesia Haas, Coinbase CFO

“So right now we're focused on building liquidity and building trading volume. And we are providing incentives to various market participants and focus on building that depth of liquidity in each of the order books as we put them on the platform. So, yes, I do believe that over time our fees will evolve and become more mature as we gain this to the scale and market position that we seek to have. And that right now we are not focused on monetizing at the top of the range.

That said, we're going to monetize this competitive with the market. And this is a lower priced product than spot trading. And so you can see us be in a competitive market position here, but not at the current levels that we are today.”

Coinbase is hinting at a path to higher fees, but remaining at a lower take rate than spot trading, requiring more volume to generate the same amount of revenue.

Tokenizing Securities

Management also discussed the tokenization of securities, where they see the potential for a wide range of real-world assets to be brought on-chain with real-time clearing, settlement, and ability to trade 24/7 across the globe.

Q: John Todaro, Needham:

“I have a broader question about the overall vision for Coinbase to maybe become something a lot bigger than a crypto brokerage. The two areas I see are stablecoins and the tokenized real-world assets, which you've discussed some, you could see a world where a lot of that transfer activity ultimately happens on Base. So one, just do you agree with that vision? And then two, is there anything more specifically you guys can do to push both of those segments?”

A: Brian Armstrong, Coinbase CEO:

“Well, that is definitely the plan. … And tokenizing real-world assets or traditional securities. I mean eventually, real estate, the debt markets like private credit, everything should come on chain. It's really just a more efficient way of transferring value and it can do real-time settlement and eliminate various risks that are out there in the ecosystem. So I mean, there's lots that we can do on this front.”

Crypto and Global GDP

Coinbase also shared a long-term vision for the crypto industry, predicting that “up to 10% of global GDP could be running on crypto rails by the end of this decade.” Management noted that “only about half of 1% of global GDP is [currently] running on crypto rails, but we think that, that could expand dramatically by the end of the decade.”

Based on global GDP of ~$105 trillion in 2023, that correlates with about $500 billion of GDP running on crypto. By 2030, global GDP is estimated to rise to $140 trillion, per the IMF, suggesting that crypto’s influence could rise to $10 trillion to $14 trillion should this prediction be realized – that’s more than 20x growth from today for the industry.

Conclusion

Coinbase posted a large beat in Q4 as elevated trading activity and higher volatility drove triple-digit transaction revenue and trading volume growth. Management highlighted revenue diversification with stablecoin and USDC contributions rising, with blockchain rewards and international markets two other growth outlets. Q1 is also off to a solid start with trading volumes keeping pace with Q4, with transaction revenue at $750 million halfway through the quarter, setting the stage for a strong entrance to 2025.

I/O Fund Equity Analyst Damien Robbins contributed to this report.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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