GP Bullhound's weekly review of the latest news in public markets.

This week's GP Bullhound Tech Thoughts Newsletter, brought to you by Inge Heydorn and Nejla-Selma Salkovic, highlights Nvidia's impressive performance amidst rising GPU costs, which in turn is putting pressure on Snowflake's margins. Additionally, we delve into Workday's recent adjustment, lowering its FY25 forecast, signaling a cautious outlook for the upcoming financial year.

Market Update: The most important result report of the season, Nvidia, is now behind us. Attention is once again turning to US inflation and interest rate developments.

Portfolio Update: We bought some TSMC this week as we expected strong volumes from Nvidia, and we anticipate strong May sales numbers to be released at the beginning of June.

Weekly Conclusion: The strong results and bullish comments from Nvidia confirm that the demand for AI is very strong.

Quote of the Week

Jensen Huang, CEO of Nvidia, stated, “Companies and countries are partnering with NVIDIA to shift the trillion-dollar installed base of traditional data centers to accelerated computing and build a new type of data center, AI factories, to produce a new commodity, artificial intelligence.”

Results

Nvidia (Owned): Nvidia once again exceeded the market's high expectations. Sales totaled USD 26.04 billion, and EPS totaled USD 6.12. The outcome was above the high end of the whisper consensus. The guidance for USD 28 billion ±2% was also strong. However, the gross margin guidance was slightly light at 75.5% versus expectations of closer to 77%, due to higher memory costs and the ramp-up of the H200 and Blackwell. Datacenter sales totaled USD 22.6 billion in the quarter, driven by strong H100 sales, up 23% Q/Q and 427% Y/Y. Both H200 and Blackwell are now in production, with H200 shipping this quarter and Blackwell starting next quarter. Nvidia indicated that Blackwell sales will contribute as early as 4Q, slightly ahead of expectations. The company also noted that both platforms will struggle to meet demand this year due to high demand. The only negative was increased competition in China, which may hinder the company from returning to its previous size in that market. The 1:10 stock split in early June is also seen positively.

Our View: We continue to believe that AI will be a significant driver of investments in the coming years, with Nvidia leading the market. Competitors will find it difficult to catch up, both technically and in ramping up volumes in a constrained environment.

Snowflake (Owned): Snowflake reported 1Q sales of USD 828.7 million, above forecasts of USD 786 million, though earnings missed at USD 0.14 versus USD 0.17 expected. The company noted a stable optimization environment, with 7 of the top 10 clients growing Q/Q. Product revenue accelerated Q/Q, growing 34% Y/Y, and remaining performance obligations totaled USD 5 billion, up 46% Y/Y. The operating margin miss was due to higher GPU costs and hiring to support AI initiatives. The company lowered its full-year target to 3% due to these factors. It expects 2Q product revenue to total USD 805-810 million versus expectations of USD 788 million, and a full-year product sales forecast of USD 3.3 billion, slightly above expectations of USD 3.26 billion.

Our View: Snowflake's growth is accelerating again after a period of client optimization. Growth is driven by a more stable optimization environment and the rise of AI workloads. The company must invest to capture this growth, which may pressure margins, but the AI workloads are expected to be sticky and continue growing.

Workday (Owned): Workday's subscription revenue grew 19% Y/Y in 1Q, totaling USD 1.815 billion, with US and international growth in line. The 12-month backlog (CRPO) was USD 6.6 billion, growing 18% Y/Y. The operating margin was impressive at 25.9%, driven by higher top-line growth and cautious opex spending. The company outperformed in healthcare, financials, and the public sector, though the number of large new deals fell slightly, especially in EMEA. Higher scrutiny and lower headcount commitments led the company to lower its FY2025 subscription revenue guidance to USD 7.700-7.725 billion, representing approximately 17% growth, down from the earlier guidance of 17-18%. Renewal growth is expected to be slower in 2025 due to strong growth last year.

Our View: While the lowered subscription forecast is not ideal, the adjustment is small. Outside of AI spending, companies are becoming more cautious about corporate spending in 2025. Workday remains a strong player in platform rollouts, with 17% growth still impressive, though shares may face short-term pressure.

Analog Devices (Not Owned): Analog Devices reported sales of USD 2.16 billion, down 33.7% Y/Y, with an EPS of USD 1.4. Both numbers were slightly above expectations. The company noted that the inventory correction is nearly over and expects sequential growth in the coming quarter. Sales are expected to total USD 2.27 billion in 3Q, with an EPS of USD 1.5, both slightly above consensus. Industrial sales, which made up 44% of the quarter's sales, were down 44% Y/Y, driven by inventory digestion, with aerospace and defense being the strongest areas. Automotive sales, representing 30% of sales, were down 10% Y/Y, while communications sales, representing 11%, were down 45% Y/Y. Consumer sales, making up 11% of sales, were down 9% Y/Y, the first area to feel the downturn.

Our View: The inventory correction for semiconductors outside the leading edge seems to be stabilizing, but underlying demand remains stagnant. We believe companies in this sector will experience more stability going forward, but it will take time for recovery to gain momentum.

For enquiries, please contact: Inge Heydorn, Partner, at inge.heydorn@gpbullhound.com and Nejla-Selma Salkovic, Associate, at nejla-selma.salkovic@gpbullhound.com

About GP Bullhound: GP Bullhound is a leading technology advisory and investment firm, providing transaction advice and capital to the world’s best entrepreneurs and founders. Founded in 1999 in London and Menlo Park, the firm today has 12 offices spanning Europe, the US and Asia. For more information, visit www.gpbullhound.com