A month has gone by since the last earnings report for Nvidia (NVDA). Shares have lost about 9.7% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Nvidia due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="NVIDIA Q1 Earnings Top, Revenues Miss Mark
NVIDIA delivered first-quarter fiscal 2020 non-GAAP earnings per share of 88 cents, which topped the Zacks Consensus Estimate of 82 cents but tumbled 57% from the year-ago period. However, the metric improved 10% sequentially.
Meanwhile, revenues declined 31% year over year to $2.21 billion and also lagged the Zacks Consensus Estimate of $2.25 billion. Excess channel inventory post-crypto coupled with recent deteriorating end-market conditions impacted results.
While growth across Professional Visualization and Automotive segments was positive, a sharp downtrend in the Gaming and Data Center segment was a spoiler.
However, the company expects the second half to be stronger than the first. Further, the bullish guidance for the fiscal second quarter provided by the management is a respite. The company is expecting a recovery in its core gaming segment, backed by solid growth in mid-end gaming.
Top-Line Details
Revenues at the GPU Business fell 27% year over year to $2.02 billion, reflecting deterioration in gaming and data center GPUs as well as zero revenues from cryptocurrency mining processors. However, on a sequential basis, the metric inched up 2%.
Tegra Processor Business revenues worth $198 million slumped 55% on a year-over-year basis and 12% sequentially due to lower shipments of SOC modules for gaming platforms.
On the basis of market platform, Gaming revenues were down 39% on a year-over-year basis to $1.06 billion. However, it was up 11% sequentially.
Reduction of GPU channel inventory following tepid demand from crypto miners is a persistent overhang. Lower sales of Nintendo Switch processor were a dampener too.
However, the company is benefiting from the growing sales of Turing-powered GPUs. To this end, the launch of mid-range GeForce products is a tailwind. In fact, strong demand for the gaming laptop is an upside for the company. Moreover, the rising momentum in the games supporting the ray-tracing feature is a positive. Further, NVIDIA RTX finds a strong support in Microsoft DXR, Epic Games, Unity, Adobe and Autodesk.
Meanwhile, revenues from Data Center decreased 10% year over year and 7% sequentially to $634 million due to pause in hyperscale spending. Moreover, softness in demand from some enterprise clients was a downside.
Nonetheless, growing demand for Nvidia’s Tesla T4 GPU is an uptrend. Growth in inference revenues, bolstered by a broad-based adoption across a number of hyperscale cloud providers, such as Amazon, Baidu, Google, Tencent and Alibaba and consumer internet companies like LinkedIn, Expedia, PayPal, Pinterest, Snap and Twitter, is a tailwind.
Automotive revenues in the reported quarter totaled $166 million, reflecting a 14% year-over-year and a 2% sequential rise. This improvement was driven by autonomous vehicle development deals and the increasing uptake of AI-based smart cockpit infotainment solutions.
Moving to Professional Visualization, revenues climbed 6% year over year but were down 9% sequentially to $266 million. Strength across both desktop and mobile workstation products is a key driver. Expansion of these technologies across industries like public sector, oil and gas, and manufacturing is a vital catalyst. Management mentions that applications in the fields like AI, AR and VR contributed 38% to pro visualization revenues.
OEM and IP revenues plunged 74% year over year and 15% sequentially to $99 million due to absence of crypto-currency mining GPU sales.
Margins
NVIDIA’s non-GAAP gross margin contracted 570 basis points (bps) from the year-ago quarter to 59% due to weak gaming margins.
Non-GAAP operating expenses escalated around 16% from the year-earlier quarter to $53 million due to higher R&D expenses.
In dollar terms, non-GAAP operating income tanked 61% year over year to $557 million. NVIDIA’s non-GAAP operating margin deteriorated to 25% in the quarter under review from 44.5% in the prior-year period.
Balance Sheet & Cash Flow
NVIDIA exited the fiscal first quarter with cash, cash equivalents and marketable securities of $7.80 billion compared with $7.42 billion in the previous reported quarter. The company’s long-term debt is flat at $1.99 billion.
Cash flow from operating activities was $720 million in the fiscal first quarter, down from $898 million in the sequential quarter.
Free cash flow during the fiscal first quarter came in at $592 million, down from $695 million in the earlier reported quarter.
The company did not make any stock repurchases in the quarter due to its pending buyout of Mellanox. Management stated that the company is committed to returning $3 billion to shareholders through the end of fiscal 2020 in the form of dividends and buybacks. So far, the company has returned $800 million through share repurchases and quarterly cash dividends.
Guidance
For the second quarter of fiscal 2020, NVIDIA anticipates revenues of $2.55 billion (+/-2%),
non-GAAP gross margin is projected to be 59.5% (+/-50 bps). Non-GAAP operating expenses are forecast to be $765 million. GAAP and non-GAAP tax rates are envisioned at 10% (+/-1%) each.
The company expects the pause in data center spending to persist in the second quarter and therefore, visibility remains low. Due to this, the company probably stayed away from providing any outlook for fiscal year.
However, anticipation of a recovery in the gaming market is a good sign. Management also sounded optimistic about the stabilization in Chinese gaming demand. Solid demand for gaming laptop is an upside for the company. Nonetheless, management fears that Intel’s CPU shortage will be a lingering drag on the business in the initial stage.
Moreover, management expects automotive supporting Level 2+ autonomy to ramp up only in 2021 and 2022. Further, robotaxi production is likely to gather steam in 2020 and 2021.” data-reactid=”24″>NVIDIA Q1 Earnings Top, Revenues Miss Mark
NVIDIA delivered first-quarter fiscal 2020 non-GAAP earnings per share of 88 cents, which topped the Zacks Consensus Estimate of 82 cents but tumbled 57% from the year-ago period. However, the metric improved 10% sequentially.
Meanwhile, revenues declined 31% year over year to $2.21 billion and also lagged the Zacks Consensus Estimate of $2.25 billion. Excess channel inventory post-crypto coupled with recent deteriorating end-market conditions impacted results.
While growth across Professional Visualization and Automotive segments was positive, a sharp downtrend in the Gaming and Data Center segment was a spoiler.
However, the company expects the second half to be stronger than the first. Further, the bullish guidance for the fiscal second quarter provided by the management is a respite. The company is expecting a recovery in its core gaming segment, backed by solid growth in mid-end gaming.
Top-Line Details
Revenues at the GPU Business fell 27% year over year to $2.02 billion, reflecting deterioration in gaming and data center GPUs as well as zero revenues from cryptocurrency mining processors. However, on a sequential basis, the metric inched up 2%.
Tegra Processor Business revenues worth $198 million slumped 55% on a year-over-year basis and 12% sequentially due to lower shipments of SOC modules for gaming platforms.
On the basis of market platform, Gaming revenues were down 39% on a year-over-year basis to $1.06 billion. However, it was up 11% sequentially.
Reduction of GPU channel inventory following tepid demand from crypto miners is a persistent overhang. Lower sales of Nintendo Switch processor were a dampener too.
However, the company is benefiting from the growing sales of Turing-powered GPUs. To this end, the launch of mid-range GeForce products is a tailwind. In fact, strong demand for the gaming laptop is an upside for the company. Moreover, the rising momentum in the games supporting the ray-tracing feature is a positive. Further, NVIDIA RTX finds a strong support in Microsoft DXR, Epic Games, Unity, Adobe and Autodesk.
Meanwhile, revenues from Data Center decreased 10% year over year and 7% sequentially to $634 million due to pause in hyperscale spending. Moreover, softness in demand from some enterprise clients was a downside.
Nonetheless, growing demand for Nvidia’s Tesla T4 GPU is an uptrend. Growth in inference revenues, bolstered by a broad-based adoption across a number of hyperscale cloud providers, such as Amazon, Baidu, Google, Tencent and Alibaba and consumer internet companies like LinkedIn, Expedia, PayPal, Pinterest, Snap and Twitter, is a tailwind.
Automotive revenues in the reported quarter totaled $166 million, reflecting a 14% year-over-year and a 2% sequential rise. This improvement was driven by autonomous vehicle development deals and the increasing uptake of AI-based smart cockpit infotainment solutions.
Moving to Professional Visualization, revenues climbed 6% year over year but were down 9% sequentially to $266 million. Strength across both desktop and mobile workstation products is a key driver. Expansion of these technologies across industries like public sector, oil and gas, and manufacturing is a vital catalyst. Management mentions that applications in the fields like AI, AR and VR contributed 38% to pro visualization revenues.
OEM and IP revenues plunged 74% year over year and 15% sequentially to $99 million due to absence of crypto-currency mining GPU sales.
Margins
NVIDIA’s non-GAAP gross margin contracted 570 basis points (bps) from the year-ago quarter to 59% due to weak gaming margins.
Non-GAAP operating expenses escalated around 16% from the year-earlier quarter to $53 million due to higher R&D expenses.
In dollar terms, non-GAAP operating income tanked 61% year over year to $557 million. NVIDIA’s non-GAAP operating margin deteriorated to 25% in the quarter under review from 44.5% in the prior-year period.
Balance Sheet & Cash Flow
NVIDIA exited the fiscal first quarter with cash, cash equivalents and marketable securities of $7.80 billion compared with $7.42 billion in the previous reported quarter. The company’s long-term debt is flat at $1.99 billion.
Cash flow from operating activities was $720 million in the fiscal first quarter, down from $898 million in the sequential quarter.
Free cash flow during the fiscal first quarter came in at $592 million, down from $695 million in the earlier reported quarter.
The company did not make any stock repurchases in the quarter due to its pending buyout of Mellanox. Management stated that the company is committed to returning $3 billion to shareholders through the end of fiscal 2020 in the form of dividends and buybacks. So far, the company has returned $800 million through share repurchases and quarterly cash dividends.
Guidance
For the second quarter of fiscal 2020, NVIDIA anticipates revenues of $2.55 billion (+/-2%),
non-GAAP gross margin is projected to be 59.5% (+/-50 bps). Non-GAAP operating expenses are forecast to be $765 million. GAAP and non-GAAP tax rates are envisioned at 10% (+/-1%) each.
The company expects the pause in data center spending to persist in the second quarter and therefore, visibility remains low. Due to this, the company probably stayed away from providing any outlook for fiscal year.
However, anticipation of a recovery in the gaming market is a good sign. Management also sounded optimistic about the stabilization in Chinese gaming demand. Solid demand for gaming laptop is an upside for the company. Nonetheless, management fears that Intel’s CPU shortage will be a lingering drag on the business in the initial stage.
Moreover, management expects automotive supporting Level 2+ autonomy to ramp up only in 2021 and 2022. Further, robotaxi production is likely to gather steam in 2020 and 2021.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="How Have Estimates Been Moving Since Then?” data-reactid=”30″>How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="VGM Scores” data-reactid=”32″>VGM Scores
Currently, Nvidia has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren’t focused on one strategy, this score is the one you should be interested in.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Outlook” data-reactid=”35″>Outlook
Nvidia has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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