Nvidia (NVDA) Q2 Earnings Preview: When Will the Chip Maker's Growth Return?

Now the question investors and Wall Street need an answer to is when will Nvidia's growth return? Read More...

Nvidia NVDA shares have slightly outpaced the S&P 500 in 2019, but that is likely more of a function of the chip firm’s massive, late-2018 selloff than anything else. The GPU powerhouse has taken a hit amid the broader semiconductor market downturn, which has been amplified by the ongoing U.S.-China trade war.

Now the question investors and Wall Street need an answer to is when will Nvidia turn things around?

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Nvidia posted stronger-than-projected earnings and revenue results last quarter. Under normal circumstances, Wall Street and investors would likely have flocked to Nvidia shares as they had for the better part of the previous five-plus years. However, the last two periods have been abnormal for the chip maker, and Q1’s beats only showed that the company performed somewhat better than its massively subdued expectations.

Nvidia’s management was far more positive about Q1 2020, which it reported on May 16, than they were in Q4 2019. CEO Jensen Huang called the fourth quarter of the firm’s previous fiscal year “an extraordinary, unusually turbulent, and disappointing quarter.” Last quarter, Nvidia’s chief executive said his company was “back on an upward trajectory.”

Despite the upbeat tone, Nvidia still saw its quarterly revenue tumble 31% from the prior-year period, which was even worse than Q4’s roughly 24% top-line decline. Those two dismal sales figures might not paint a rosy picture. But Nvidia’s management noted that it was able to return to growth in its gaming unit. This is a good sign for the company that rose to prominence, in part, on the back of its gaming-focused GPUs, which help create more lifelike graphics and more.

Overall, Nvidia was still negatively impacted by the cyclical nature of the chip industry, along with lower demand from cryptocurrency miners and data centers, and other headwinds. The broader semiconductor industry is down around 5% over the last 12 months. This includes a small downturn from Intel INTC and a 13% decline from Micron MU. There have been outliers, such as Advanced Micro Devices AMD, which has soared 60% during this stretch.

The broader chip market has bounced back in 2019 and has largely tracked the S&P 500’s movement. Looking ahead, there are signs that overall semiconductor demand is set to pick up again. And Nvidia remains a strong company overall that appears poised to expand for years to come as its products are used in everything from cloud-focused data centers to artificial intelligence.

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Moving on, NVDA’s Q2 revenue is projected to fall 18.5% to $2.55 billion, based on our current Zacks Consensus Estimates. Investors might be pleased to see that this would mark a noticeably slower downturn than the trailing two periods and help to showcase that a return to growth might not be too far off. And this does appear to be the case even though the firm’s Q3 sales are expected to slip 8%. This would help push full-year fiscal 2020’s revenues down 7.15% from 2019’s $11.72 billion to $10.88 billion—which was up 21% from 2018.

Peeking further ahead, Nvidia’s fiscal 2021 revenue is expected to climb nearly 22% above our current year estimate to reach $13.23 billion. The firm’s longer-term sales growth could help to offset what does appear to be another few quarters of both top and bottom-line downturns.

Nvidia’s adjusted Q2 earnings are projected to fall 40.7% to hit $1.15 per share, with Q3’s EPS figure expected to slip by 18.5%. NVDA’s full-year earnings are projected to fall 20.6%. In a similar fashion, the firm’s 2021 EPS is projected to soar 36% above our current year estimate to easily surpass 2019’s figure.

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Nvidia’s earnings estimate revision activity has been largely nonexistent over the last 60 days and NVDA is a Zacks Rank #3 (Hold) at the moment. Some might be tempted to bite off a piece of Nvidia stock heading into its earnings release with the stock so far off its highs, but that is, of course, a risk. Instead, investors might want to see how Nvidia’s updated guidance comes in amid the overall global economic uncertainty.

Nvidia is scheduled to release its Q2 fiscal 2020 earnings results after the closing bell on Thursday, August 15. Make sure to come back to Zacks for a complete breakdown of the firm’s actual quarterly earnings results.

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