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NVIDIA Earnings – Low Expectations Result in Soft Beat on Discounts

May 16, 2019
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NVIDIA (NASDAQ:NVDA) reported its earnings after the close today and despite the very slight beat the numbers still don’t make for particularly pretty reading. Concerns around the chipmaker had been widespread after a Q4 where it slashed guidance and revenues collapsed by over a billion dollars. What we see today then is what CEO Jensen Huang refers to as being “back on an upward trajectory” and the market is reacting positively in after-hours trading with the stock popping and up to $169.93 at time of writing, although it has pared some of its initial gains after the earnings release.

Headline numbers:

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  • GAAP overall revenue of $2.22 billion vs analyst expectations of $2.2 billion.
  • GAAP diluted earnings per share of $0.64
  • Gaming up quarter on quarter by 11%, down year on year by 39%
  • Data Centre down quarter on quarter by 7%, down year on year by 10%

The headline numbers make for interesting reading, particularly in that pre-earnings speculation of data centre softness on the back of Intel (NASDAQ:INTC) also seeing a slowdown in data centre revenues appear to have been borne out. Luckily for NVIDIA, it has the powerhouse segment of gaming which it can rely on to get it across the line.

NVIDIA Earnings – Gaming Discounts Drive Revenues

It’s no secret that NVIDIA has been struggling to convince gamers that its latest Turing architecture is worth the expensive investment with only a handful of games supporting the new features and some gamers even unsure if they’re seeing any difference. Although raytracing is seen as the future of gaming and traditional rasterization being regarded as approaching its peak, the industry still has yet to adopt it in any meaningful way which is likely part of the problem. This, combined with the well-publicised collapse in the crypto market has brought the segment revenue down from a peak of $1.8 billion just three quarters ago down to the $1 billion this quarter.

Interestingly here, the margin numbers on the surface make for slightly confusing reading. Margin is up on a quarterly basis (370 basis points), although down on an annualised basis (670 basis points), however in the CFO’s commentary, it is explained that the annual decrease indeed reflects lower margin on gaming products while the quarterly increase is due to one-time charges which were booked in the previous quarter for excess inventory.

Put it all together and what do we have? Discounts in the gaming segment which have resulted in a lower margin profile (although still healthy) but which have occurred to push the revenue for the section to allow for a very small beat in earnings expectations. The level of discounting appears to have been spot on target to ensure the earnings beat without eating too much into margin beyond what was required to keep NVIDIA stock from collapsing.

NVIDIA Forward Guidance

NVIDIA is guiding Q2 revenue of approximately $2.55 billion +/- 2% with margin increasing slightly to 59.2% (although still well down on a year ago where it recorded 64.5%). As such, it’s looking for about $300 million in growth with a better margin profile. A return to growth is important, particularly for a company with a PE as high as NVIDIA’s (over 26), but it’s worth keeping in mind that the story is still one of caution for the time being.

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As we have been writing about for quite a while now, NVIDIA (and its investors) has been particularly keen to diversify its revenue profile. Gaming has always been the powerhouse segment for the firm which should of course be no surprise given its history. However this is seen as a highly cyclical business which is prone to shocks and consumer spending profiles. Professional markets such as the pro-visualisation space, automotive and data centre have been key to its attempts to get revenue on the books from other areas besides gaming and since the Q4 downturn (NVIDIA stock is still about 45% down on its October high) it’s clear that a mix of trade war concerns (NVIDIA is quite exposed to China) as well as its continued reliance on gaming to drive revenues have hit the stock.

The problem isn’t so much that gaming is a bad segment to drive revenue from, but in order to maintain the lofty PE the company has vs someone like Intel, NVIDIA has to show a strong growth trajectory and the gaming market will absolutely continue to give money to the firm but is unlikely to sustain revenue growth to continue justifying the stock price at current levels. As such, diversification is seen as the key.

Wrapping Up

It’s also worth noting that while large development studios are implementing raytracing features to take advantage of NVIDIA’s Turing architecture, it is conceivable that the capabilities will not see huge adoptions as standard across games until consoles also have comparable chips. The trouble here is that AMD (NASDAQ:AMD) owns the console space at present so it’s difficult to see Turing raytracing making huge inroads in the short term to becoming a must implement feature in any game that’s coming out.

In the automotive sector, it has been well publicised that Tesla (NASDAQ:TSLA) has dumped NVIDIA in favour of its own in house chips (Jim Keller designed of course) for full-self driving, however some analysts are seeing this as a positive given that if other automotive manufacturers want to compete with Tesla on self-driving, they’ll be needing to buy NVIDIA chips since Tesla is unlikely to offer them out to other manufacturers. Intel’s MobilEye unit is largely seen as a legacy platform now and will probably be unable to compete with Tesla or NVIDIA for full self-driving.

So we have here a company with reasonable prospects to be sure, but still well down on where it has been in recent times. Against the current economic backdrop however with possible major trade war exposure, yield curve inversions and analyst expectations of a global economic downturn increasing, the current PE may be hard to maintain for long.

Source: NVIDIA Earnings

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