NVIDIA Second Quarter Results for 2017 (FY18) Are Out – Posts Record EPS of $1.01 On Revenue of $2.23 Billion On Strong GPU Sales (Analysis)

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Aug 10, 2017
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NVIDIA’s latest quarterly report is out and sticking to tradition, the company has managed to beat consensus estimates on both earnings and revenue. Analysts were expected a non-GAAP EPS of 75 cents on revenue of $2.1 Billion but the green giant managed to beat with a very wide margin and post an EPS of 101 cents on record revenue of $2.23 Billion. GAAP EPS was not too far behind at 92 cents.

The company has seen massive growth since just a year ago with revenue jumping 56 percent and EPS jumping 91% and 124% for the non-GAAP and GAAP based calculations respectively. Not only that but the company managed to clock positive growth in all segments with not a single business unit showing a decline.

In the first half of fiscal 2018, NVIDIA (NASDAQ:NVDA 188.16 1.06%) has paid $758 million in share repurchases and $166 million in cash dividends. For fiscal 2018, NVIDIA intends to return $1.25 billion to shareholders through ongoing quarterly cash dividends and share repurchases. NVIDIA will pay its next quarterly cash dividend of $0.14 per share on September 18, 2017, to all shareholders of record on August 24, 2017

Our take as NVIDIA (NASDAQ:NVDA 188.16 1.06%) stock braces for minor correction as market decides what to do with high P/E, low auto growth and flat guidance

Note: I do not own any stock in Nvidia, AMD or Intel, nor plan to do so for the foreseeable future.

Even though NVIDIA outperformed the consensus and exceeded expectations in pretty much all regards, the stock has taken a turn for the worse. As of right now, it is down 6.61% from market close. Keep in mind however, at the time of writing we are dealing with after-market hours with very limited volume but the general sentiment of the market can be traced back to several reports which were out there before the earnings.

The primary cause for this downward turn after some stellar earnings can be attributed to two things: somewhat flat guidance for Q3 FY18 and the very high P/E multiple of the company. Currently NVDA sits at around 55x on the P/E side with a dividend yield of around 0.34%. In comparison, Intel has a P/E of 13x with a dividend yield of around 3.02%. Many pundits consider this high level of P/E unjustified and unsustainable if the company does not continue to grow – and since they have guided a relatively flat Q3, you are seeing corrective action from the initial market response.

As mentioned before however, since we are dealing with after-market hours, we cannot completely rely on the momentum so far. Morning come, things can take a turn for the better or worse. We see an immediate support level at the $153 price level but if the stock regresses further, secondary support can be found at the $139 price level.

That said, as far as fundamentals and growth go, NVIDIA remains an exceptional company. It has big plans for the autonomous sector and unfortunately we did not saw much growth in the autonomous sector in this quarter (just $2 million, which is a drop in the bucket). Much of the high P/E can be justified as speculation on the company’s expected performance in the autonomous market, and unless it starts to deliver on that soon, the market could decided that corrective action is warranted.

As far as the market is concerned, the name of the game is diversification. NVIDIA being the clear victor in the GPU industry is no longer news – their eyes are now on the autonomous and self driving sector, which could bring in significant financial reward and justify much of the speculation as it bears fruit.

Bottomline: Here’s the thing however, I firmly believe that any corrective action at this point in time would make the stock underpriced for the long haul, so if you believe in the Warren Buffet approach to investing and aren’t a day trader I would recommend holding it/buying in at key price points. The reason being that most of the moves NVDA has made at the moment in the autonomous sector will not bear fruit till at least a couple of years. Toyota picked Drive PX for their next generation autonomous driving cars and Volvo and Autoliv have already signed up for Drive PX for their autonomous cars of 2021. Note however, that the target date. The autonomous market itself is currently taking root and full bloom won’t happen until 2020 at the earliest.

NVIDIA successfully established key deals and relationship with partners this quarter as far as the autonomous sector goes, but this wont be reflected in the numbers until a few quarters have passed, if not years. While the P/E is definitely a bit high right now, it is entirely possible that once the company’s autonomous dreams are achieved, it will be more than justified in hindsight. As far as its core GPU industry goes, I don’t even need to say much. It retains the performance crown and with Volta GPUs on the way, is in no danger of loosing its position as the industry leader any time soon. Lastly, the company did loose a small portion of revenue from the Intel-NVIDIA IP cross licensing deal but that was to be expected and wasn’t that high a number (per quarter) to begin with.

NVIDIA Q2 FY18 Financial Summary and Highlights, Guidance for Q3 FY18

 

  • Record revenue of $2.23 billion, up 56 percent from a year ago
  • GAAP EPS of $0.92, up 124 percent from a year ago
  • Non-GAAP EPS of $1.01, up 91 percent from a year ago
  • Broad growth across all platforms

During the second quarter, NVIDIA achieved progress in these areas:

  • Announced and began shipping NVIDIA® Tesla® V100 GPU accelerators, the first GPU based on the new Volta architecture.
  • Unveiled new lineup of NVIDIA DGX™ AI supercomputers, with a large installation at Facebook.
  • Disclosed that the world’s 13 most energy-efficient supercomputers on the Green 500 list run on NVIDIA Tesla accelerators.
  • Announced partnerships with VW and Baidu to bring AI deeper into their organizations.
  • Introduced Max-Q, a design approach to make gaming laptops thinner, quieter and faste
  • Announced steps to bring AI to ray tracing to advance the iterative design process, including the launch of NVIDIA OptiX™ 5.0 SDK.
  • Launched NVIDIA TITAN X and NVIDIA Quadro® external GPU support for the 25 million creative professionals using thin and light notebooks.

Since NVIDIA (NASDAQ:NVDA 188.16 1.06%) has been making a bid to be one of the leaders in the autonomous sector, here are the highlights for this quarter in that regard:

  • Toyota selected NVIDIA DRIVE™ PX for its next-generation autonomous cars.
  • Volvo and Autoliv selected DRIVE PX for self-driving cars targeted to hit the market by 2021.
  • ZF and HELLA, two leading automotive suppliers, announced a system based on DRIVE PX to deliver the highest NCAP safety ratings for cars.
  • Baidu announced that its Project Apollo open-source self-driving platform for the China market will use DRIVE PX.

Guidance for Q3 FY18 as provided by NVIDIA Corporation (NASDAQ:NVDA 188.16 1.06%) is as follows:

  • Revenue is expected to be $2.35 billion, plus or minus two percent.
  • GAAP and non-GAAP gross margins are expected to be 58.6 percent and 58.8 percent, respectively, plus or minus 50 basis points.
  • GAAP operating expenses are expected to be approximately $672 million. Non-GAAP operating expenses are expected to be approximately $570 million.
  • GAAP other income and expense is expected to be an expense of approximately $2 million, inclusive of additional charges from early conversions of convertible notes. Non-GAAP other income and expense is expected to be nominal.
  • GAAP and non-GAAP tax rates are both expected to be 17 percent, plus or minus one percent, excluding any discrete items. GAAP discrete items include excess tax benefits or deficiencies related to stock-based compensation, which we expect to generate variability on a quarter by quarter basis.
  • Capital expenditures are expected to be approximately $65 million to $75 million.

NVIDIA Corporation Q2 2017 (FY18) GAAP Financial Result

( $ in millions except earnings per share)Q2 FY18Q1 FY18Q2 FY17Q/QY/Y
Revenue$2,230$1,937$1,428Up 15%Up 56%
Gross margin58.4%59.4%57.9%Down 100 bpsUp 50 bps
Operating expenses$614$596$509Up 3%Up 21%
Operating income$688$554$317Up 24%Up 117%
Net income$583$507$261Up 15%Up 123%
Diluted earnings per share$0.92$0.79$0.41Up 16%Up 124%

NVIDIA Corporation Q2 2017 (FY18) Non-GAAP Financial Result

( $ in millions except earnings per share)Q2 FY18Q1 FY18Q2 FY17Q/QY/Y
Revenue$2,230$1,937$1,428Up 15%Up 56%
Gross margin58.6%59.6%58.1%Down 100 bpsUp 50 bps
Operating expenses$533$517$448Up 3%Up 19%
Operating income$773$637$382Up 21%Up 102%
Net income$638$533$313Up 20%Up 104%
Diluted earnings per share$1.01$0.85$0.53Up 19%Up 91%
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