Nvidia reported earnings yesterday, and they disappointed in so much as a company that has grown like they have sooner or later had to revert to just a good quarter. Earnings and EPS both came in ahead of expectations, and guidance for next quarter was a touch above consensus, which for any other company would be just fine. Our guess is that most investors who listened to the call probably came away feeling good about the company’s prospects. Management had good explanations for areas that were a bit weak, and strong expectations for the future.
Nvidia trades at a healthy multiple, and so investors are starting to climb a bit of wall of worry with every news report adding a bit to the anxiety. So the company got questions about delays to the launch of the Blackwell products, questions about supply constraints, and hand wringing around gross margins. But they also added a few concerns in their results. For instance, their networking revenue was down sequentially. They just started breaking out this figure earlier this year and it remains a bit of a black box. Management assured investors that all of these are just temporary concerns and next quarter will see improvement in all areas.
We are not going to contest Nvidia’s long-term prospects here. Those need to explored in a deeper look at the long-term outlook for AI and the eventual shift to AI Inference compute. That being said, we do think there was something a bit ‘off’ about the quarter. Our best guess is that the company is in transition from Hopper to Blackwell lines and no matter how much demand there is for both, this has to be causing some friction in the market. Of course, they indicated that Hopper has likely peaked and will start to declining in 2025.
But there is also something interesting going on in the company’s working capital .
| 1Q23 | 2Q23 | 3Q23 | 4Q23 | 1Q24 | 2Q24 | 3Q24 | 4Q24 | 1Q25 | 2Q25 | 3Q25 | |
| Days Inventory | 159 | 128 | 167 | 177 | 140 | 124 | 147 | 155 | 179 | 159 | 110 |
| Days Sales | 55 | 72 | 78 | 65 | 49 | 37 | 38 | 37 | 39 | 40 | 28 |
| Days Payables | 21 | 30 | 30 | 20 | 15 | 10 | 11 | 10 | 9 | 10 | 12 |
| Cash Conversion Cycle | 193 | 170 | 215 | 222 | 175 | 151 | 174 | 182 | 208 | 190 | 126 |
During the quarter, the company burned through a big pile of inventory, with days inventory dropping from 159 to 110. Days receivable also fell, from 40 to 28, with the total cash conversion cycle plummeting from 190 to 126 days. The most likely explanation of this is that they are performing spring cleaning ahead of the Blackwell ramp in 2025. Clear out inventory, get everyone to pay their bills. That could be read as a fairly optimistic stance. For the more cynically minded, another interpretation is that they are priming powder for tougher times ahead. Do they expect to need to use working capital to goose things a bit in a quarter or two?
Our take is largely benign in that if the company had merely maintained last quarter’s cash conversion cycle their numbers would likely have been much stronger. The fact that they cleared the decks in this way is probably a positive signal, but it bears watching further.
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