Nvidia's Supply Commitments More Than Doubled to $279 Billion. Here's What It Does to the Stock.

Nvidia (NASDAQ:NVDA) reported another enormous quarter on Wednesday. Revenue for the second quarter of fiscal 2027 (the period ended July 26) more than doubled year over year, coming in at a record $96.2 billion.

Data center revenue rose even faster, climbing 117% to $89.0 billion. And shares moved higher in after-hours trading following the report.

The most revealing figure, however, sat in the company's CFO commentary.

Nvidia's supply commitments (the purchases it has promised its suppliers) stood at $119 billion a quarter ago. They now total $279 billion, an increase the company said was "primarily related to the procurement of memory."

That figure arrived alongside a step-down in guidance for profitability. Nvidia expects a gross margin of 74% in the fiscal third quarter, down from 75% in the quarter it just reported. So how much of the rising cost of memory is Nvidia absorbing rather than passing on? Management addressed this directly on the earnings call. And the full picture is arguably bigger than the guidance alone suggests.

Image source: Getty Images.

Memory for the next several years

Nvidia said it has partnered with its suppliers to lock down the components it needs for the next several years of demand. And the schedule shows how concentrated the buying is -- about $267 billion of the total comes due by the end of fiscal 2029.

The balance sheet is filling up, too. Inventory rose to $31.6 billion from $25.8 billion a quarter earlier as the company prepares to introduce Vera Rubin, its next-generation platform, in the current quarter.

In other words, Nvidia is, in a sense, stockpiling one of the scarcest inputs in the artificial intelligence (AI) build-out before prices climb further.

Absorbing now, passing along later

Gross margin was 75% in the fiscal second quarter, an improvement from 72.5% a year earlier on a non-GAAP (adjusted) basis. It is guided to 74% in the third. And chief financial officer Colette Kress reset expectations beyond that guidance. The magnitude of memory price increases has exceeded the company's expectations and is headed higher into next year, she said. Margins should bottom out in the fourth quarter in the range of 71% to 72%, then settle at 72% to 73% in fiscal 2028 as executed price increases take effect in the first quarter.

"We want to be direct about this rather than let it linger as an open question," Kress said on the earnings call.

So the trough is three to four percentage points below the second quarter's level, not the single point the third-quarter guidance shows. At the company's current revenue scale, a point of gross margin is worth about $1 billion a quarter.

Nvidia, in short, is absorbing most of the memory bill through January and passing part of it along in higher prices after that.

Notably, Kress also framed the scarcity itself as a symptom of demand. Memory is tight, she argued, in large part because of the same AI build-out driving Nvidia's own growth.

The stock can afford the trough

Investors don't seem rattled, and I don't think they should be. The stock, which closed near $210 on Wednesday, rose about 5% in after-hours trading.

Additionally, the company's momentum is extraordinary. Nvidia guided to $108.0 billion of revenue for the fiscal third quarter, implying about 89% year-over-year growth -- and that outlook assumes zero data center compute revenue from China. Even at the guided margin, gross profit in dollars likely keeps climbing. And the company returned a record $26.0 billion to shareholders in the quarter through share repurchases and dividends.

The valuation looks surprisingly reasonable, too. Shares cost about 27 times earnings. Against the earnings analysts expect for next fiscal year, the price-to-earnings ratio drops to about 16. For a company compounding at these rates, that hardly seems demanding.

Sure, the guidance could prove optimistic. Memory prices have already outrun the company's expectations once, and the recovery to 72% to 73% depends on those executed price increases holding through fiscal 2028.

But I'd rather own a company absorbing costs because demand is outrunning its supply than one cutting prices because demand is soft. The $279 billion of commitments secured years of supply, and the margin trough is the bill for it.

So, what does this massive sum of commitments do to the stock? Overall, I think it makes shares worth holding onto for the long haul.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.