Nvidia's Big Number

In this podcast, Motley Fool analyst Tim Beyers and host Mary Long discuss:

• Market relief about some Trump trade saga news.
• A rose and a thorn from Nvidia's latest report.
• Another trade-related announcement that affects the semiconductor supply chain.

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A full transcript is below.

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This podcast was recorded on May 29, 2025.

Mary Long: When Nvidia speaks, the world listens. Unless, of course, there's something else to pay attention to. You're listening to Motley Fool Money. I'm Mary Long joined today by Mr. Tim Beyers. Tim Beyers, joining us on Motley Fool Money twice in one week. Thanks for being here, Tim.

Tim Beyers: Thank God. I'm fully caffeinated and ready to go. That's too many times.

Mary Long: Got to have something to keep you going. Luckily, we don't have any shortage of things to talk about today. Of course, we've got earnings from Nvidia, which dropped its results yesterday after the bell. Typically, the morning after Nvidia drops results, we clear the show. We spend the whole time talking about that. Today, though, another story seems to be stealing some of Nvidia's spotlight because the US Court of International Trade, which is made up of three judges in Manhattan, ruled that Trump's tariffs are effectively illegal. Tariffs, having been the big story of the past, God, I feel like we're in a bit of a time warp. I don't even know how long it's been, but at least since early April, Tariffs having taken up most of the news since then, this is obviously a pretty big deal.

Trump's tariffs were issued on the basis of this 1977 law that allows the executive branch to implement commerce controls in the case of a national emergency. Trump had said, hey, the trade deficits that the US has, that constitutes a national emergency. Now, this court says no dice. This is, again, yet another chapter in this, will we, won't we, up and down, back-and-forth tariff saga that's been going on since Liberation Day. Neither of us are legal experts, Tim, but you are a stock expert. What in the world does this latest tariff change mean for investors?

Tim Beyers: Oh, this answer is going to be so snarky. Snarkiness alert, because the only real answer here is that it changes nothing until it changes something. That's a terrible trite answer. But what I mean is that we have to have a ruling, and this ruling will be challenged. The short-term intact impact, I should say, is probably be a delay in implementing some tariffs, and that's likely to be very good for some importers, certainly. But we need to know, will countries on the other side of these reciprocal tariffs that were announced on Liberation Day, just because we've deemed them illegal for now, will they pause their own tariffs? Is the so-called deal that is coming with the EU, is there still something to be done there? We really just do not know. This is a line in the sand. I am certain that the President is not very happy about it and will fight this and so we'll find out. What I think we're seeing in the market, though, just to put this in investing terms, Mary, sometimes we have these things called a relief rally.

This feels like a relief rally like, oh, man. Tariffs were not good for a number of companies. There were a number of companies that were manufacturing, for example, in Vietnam, like, this means that the Vietnamese market is back open for manufacturing, fan-free fantastic. Like, that is the definition of a relief rally. Hey, baby, this is awesome. We have ourselves a big summer moment. We all jump in the pool and have fun, but we don't know that that's going to be the case yet. Expect court challenges, expect legal experts to weigh in, and then we'll see what's real.

Mary Long: Despite continued uncertainty, the market is up a bit on this news, seeing a bit of this relief rally that you mentioned. Market's also being lifted by Nvidia. Let's talk Nvidia. Tim, you and I were at Venture X as co-working space yesterday afternoon, and we got to talking a bit about those results then. Of particular interest to you yesterday was the company's free cash flow. Nvidia posted $24 billion in free cash flow this quarter. That is, obviously a very big number. But the thing about Nvidia is they're always dealing in big numbers. This is a company that's used to triple-digit revenue growth. Why is this big number catching your eye?

Tim Beyers: Well, consider what it would mean if Nvidia can keep the pace we've seen here at 24 billion a quarter, the company would be on track to deliver 96 billion in organic free cash flow this fiscal year. That's close to a 3% forward-free cash flow yield. To put that in context, Mary, the market average, the average for the S&P 500 is 3.3%. If we take that as real, you could make the argument that Nvidia is trading pretty reasonably. I have not made that argument, by the way, but if you wanted to make that argument, you could, if there's enough evidence that 96 billion in current year FCF is actually achievable. I recognize that's a big if. It requires growth to continue at the pace we're seeing, and just for context, the Data Center business, which is driving all the results at Nvidia right now. Data Center revenue was up, I believe it was 73% year over year. You need to see very high growth rates. But let's say it's real because the context here, Mary, is that, according to S&P Global Market Intelligence, our friends at Capital IQ, the average consensus estimate for free cash flow for this fiscal year is 103 billion, 96 billion is underselling it. That is insane. These are not Pollyanna estimates. If that's true, this might be a very good year to be a Nvidia shareholder.

Mary Long: You're very impressed by the free cash flow. But as we were talking before we started recording, you mentioned that you've got a gripe with something else within the Nvidia results. What might that gripe be, Mr. Beyers?

Tim Beyers: I just don't understand why Nvidia pays a dividend. I think we just have to stop. You just have to say, look, I know. It's a 1-cent-per-quarter dividend. We're not even going to pretend that we can't, it's the thing that, like, that thing that you do that you only do it because somebody sometime at some point, said, you should do that. You're like, but I don't want to do that. I really hate doing that. It's like they're begrudging, paying a dividend. Then don't do it. Don't do it. It's only 1 cent a quarter. Let's put it this way, Mary. At some point, you just shouldn't be allowed to say you pay a dividend. If your dividend yield is 0.03%, that's not a dividend. That's just insane. Look, you either pay one and investors can look forward to it, and they can take that capital and reinvest it how they want to maximize their returns, or you do the other thing you do. If you care about shareholder returns, you reinvest the money back into your business, and you grow faster in order to deliver returns for shareholders that way. But I just find it, it is utter nonsense, Mary. It's so outrageous. Just please stop. Either do it for real or stop.

Mary Long: Not too long ago, Nvidia stock dropped on the news that it would no longer be able to sell what's referred to as H20 chips to China. These H20 chips were specially made to comply with US export controls to China. Then the Trump administration made changes to those export controls and bibbidi-bobbidi-boo, it became illegal for Nvidia to sell those special chips to China. The company incurred a 4.5 billion dollar charge from excess H2O inventory this past quarter, and it warned that it expects to lose about $8 billion in the second quarter revenue, as well. Tim, whenever I hear about this story, I cannot get the image out of my head of just a pile of chips that took up so much time and energy and material, and brainpower to build, just sitting in a pile and something about that image makes me so sad. Am I putting too much weight in this? Is there really nobody in the whole world that wants to buy these chips?

Tim Beyers: Maybe not. I'm not so sure that's a bad thing. These chips were effectively optimized for the Chinese market, so why would they be useful somewhere else? Nvidia needs to ensure that it builds according to what its customers need. If that means creating chips that can't easily transfer from one market to another, then so be it. It's not like there isn't enough global demand for what Nvidia offers, Mary. Go back to that cash flow number that we were talking through. They are doing just fine. Look at it this way, with the write-down in place and the expectations of write-downs to come in place, if Nvidia finds even a tiny sliver of a fraction of those chips being sold somewhere else or maybe refactored to fit in a slightly different market, and not all of them are sold maybe it's like $500 million. Well, that's $500 million nobody was counting on. I think it's probably immaterial at this point. But then if they do find a way to capture some value from what we thought was 12.5 billion of lost value, well, then look out. That will be a nice little catalyst.

Mary Long: Immaterial, perhaps, but interestingly, Jensen Huang really seems to be focused on.

Tim Beyers: He's bothered by it.

Mary Long: He's bothered by it, for sure. Last week, he called US Chip export controls a failure. Granted, of course, Huang himself has admitted that the biggest impact of a lot of these restrictions that we've seen have been the erosion of Nvidia's competitive position. Another Huang quote from this most recent earnings call is that "China is one of the world's largest AI markets and a springboard to AI's success." I want to double-click on that with you, Tim. China is important to AI if you ask Jensen Huang. How important is China to Nvidia? These H20 chips aside?

Tim Beyers: Well, it's fast-growing. The worry from Jensen, and I think he's right to express it this way is it's one of the markets where consumption of AI infrastructure is likely to continue at a very brisk pace. It's a fast-growing territory. But in terms of pure numbers right now, it's the fourth largest geographical revenue contributor for Nvidia in fiscal 2025, and that was behind the US, Singapore, and Taiwan. China would argue that you should include Taiwan in your calculation of Chinese revenue because they don't recognize that Taiwan is not part of China. But I would say it's the potential growth rates, and Nvidia doesn't want to miss out on that. Is it important? Yes, it is important. Now, to be fair, we are dealing with a court challenge to come about what's going to happen with tariffs. It's not the same thing as export controls. But if we start to loosen restrictions, will that have an impact here? I don't know. But it's an important market, but it's not the end-all-be-all market. Let's be clear. The US is far and away still the biggest market for Nvidia.

Mary Long: I want to take a beat to tie together the latest on tariffs in this court challenge that we're seeing there with the latest from Nvidia. Importantly, shortly before Nvidia's earnings, news broke about a new Trump administration announcement from the Commerce Department, and this announcement orders a number of companies to stop shipping goods to China, even if they'd previously been permitted to do so. This largely falls in the realm of chips. This report basically says if you don't have a license to sell chip software to China, you cannot sell to China and if you do have a license, it's now under review. The heart of this announcement are three companies, Cadence Design Systems, Synopsis, and another that's a subsidiary of Siemens. These companies are center stage because they're the top makers of electronic design automation software or EDA software. Let's start by connecting these dots. What is EDA software, and why does the Trump administration not want China to have it?

Tim Beyers: You've defined what it is. It's design software. Essentially, it's the tooling you use to create chip designs that are then brought to life in manufacturing. But it's bigger than that. EDA is critical in that it allows for the testing and verification of a chip or a series of chipsets in the design phase. What you're doing is you are generating designs. You are running those designs through paces, because what you don't want, and you can imagine this because chip manufacturing is so sensitive and so expensive, Mary, that if you were to run a bunch of chips through manufacturing, you imprinted circuits on wafers, and then you were done, and then you had a run, and you had chips that were failing straight off the line. By the way, failure rates in wafers used to be much higher. It used to be measured, it probably still is measured this way. I'm not as up-to-date on my chip manufacturing lingo, but we used to call them yields.

The yield on the wafer was so important. You had a bunch of chips manufactured out of this wafer, and if you had a 70% yield, for example, 30% of the chips on that wafer would have failed. You don't want yields that high. You would like the yields to be much better than that. EDA is a way to not only design, automate your designs, automate your tests, but test and verify in that design phase, so you have a very high level of assurance before you go to Taiwan send me and say, let's go. Let's get into production. Now, the second question you have here is why doesn't the Trump administration want China to have it? I'm guessing, but I would say that the administration isn't so keen on Cadence and Synopsis, providing tools to Chinese, chip designers, manufacturers, because they want to make it as difficult as possible to reliably replicate high-performance chipsets. They don't want to make it easy for China to compete in essentially the AI Cold War, the war for technical supremacy in AI, and Cadence and Synopsis, by virtue of the tooling that they provide, are a critical part of the value chain here of developing very high-performance chips.

Mary Long: Very likely as a byproduct of all this trade and tariff talk and the back and forth there. Jensen noted on Nvidia's earnings call that he expects Nvidia to build everything from chips to supercomputers in the US by the end of the year. That's very likely music to Trump's ears, and unsurprisingly, it sets the company up well to avoid problems with the current administration in the future. But the end of year is fast approaching Tim. What would this process actually look like? How much manufacturing does Nvidia currently do here versus overseas? Is the end of the year a legitimate timeline to move everything over here?

Tim Beyers: How many times have you said something that you know when you're talking, this person really wants to hear this and I'm going to tell them what they want to hear. You and I have both done that, Mary. I know you have because I know I've done it. I know I've done it. Jensen Huang is telling the administration what they want to hear. This is hype, I would say. Now, will there be truth to it? I would expect that there will be agreements to manufacture chips at onshore facilities being stood up, particularly by Taiwan Semiconductor. I'm certain that's true. I think for sure, he's telling at minimum, a half-truth and probably a truth in context. But will there be actual production? I would say, no, not much production, if any, production. Now, to be fair, I think it would be super interesting for Nvidia to pen a number of good agreements, including an agreement with Intel, because Intel is making real investments in its foundry business, and it needs signature customers. If there's a deal to be had there, I am very certain that Lip-Bu Tan over at Intel would love to talk to Jensen and have a real conversation about how they could handle significant portions of Nvidia's production needs right here on US shores. But how much of this is going to be done by year-end? No, come on. I appreciate Jensen is playing the game, but he's playing the game.

Mary Long: Did I catch a reckless prediction from you just now, Tim? Is that what that was?

Tim Beyers: That's probably a reckless prediction, yeah. Probably.

Mary Long: Well, then that's a good place to end it. Tim Beyers, thanks so much for the time for helping to demystify so much of the uncertainty and to dig into Nvidia's earnings with us this morning.

Tim Beyers: Thanks, Mary.

Mary Long: As always, people on the program may have interest in the stocks they talk about and Motley Fool may have formal recommendations for or against throw buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Money team, I'm Mary Long. Thanks for listening. We'll see y'all tomorrow.

Mary Long has no position in any of the stocks mentioned. Tim Beyers has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cadence Design Systems, Nvidia, and Synopsys. The Motley Fool has a disclosure policy.