<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="NVIDIA (NASDAQ: NVDA) stock has been in choppy water over the past month, and it faces a tough test this week when the company releases its first-quarter fiscal 2020 results on May 16.” data-reactid=”11″>NVIDIA (NASDAQ: NVDA) stock has been in choppy water over the past month, and it faces a tough test this week when the company releases its first-quarter fiscal 2020 results on May 16.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The graphics card specialist faces a barrage of headwinds including weak GPU (graphics processing unit) demand, loss of Tesla business, and potential fallout from the U.S.-China trade war. In the midst of all these challenges, will NVIDIA be able to report satisfactory performance?” data-reactid=”12″>The graphics card specialist faces a barrage of headwinds including weak GPU (graphics processing unit) demand, loss of Tesla business, and potential fallout from the U.S.-China trade war. In the midst of all these challenges, will NVIDIA be able to report satisfactory performance?
Image Source: Getty Images.
<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Ominous signs ” data-reactid=”25″>Ominous signs
NVIDIA expects its first-quarter revenue to crash more than 31% year over year to $2.2 billion at the midpoint of its guidance. If you’re thinking that the chipmaker can spring a surprise on this front, be ready for disappointment.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="A story on Polygon.com reports that some retailers have discounted NVIDIA’s RTX and GTX series graphics cards, as well as gaming PCs based on those chips. The GPU specialist is reportedly running discounts on its latest graphics cards for the months of May and June.” data-reactid=”27″>A story on Polygon.com reports that some retailers have discounted NVIDIA’s RTX and GTX series graphics cards, as well as gaming PCs based on those chips. The GPU specialist is reportedly running discounts on its latest graphics cards for the months of May and June.
This is an ominous sign going into the earnings report. The fact that NVIDIA is discounting its latest RTX series graphics cards (packed with the impressive ray-tracing technology) just a few months after launch indicates that it is finding it difficult to move inventories.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Similarly, there are heavy discounts on PCs powered by the GTX series cards. These older cards were recently updated with ray-tracing technology that was originally meant for its latest-generation chips. This provides further indication that NVIDIA is staring at stormy seas thanks to tepid end-market demand that’s forcing the company to run discounts to boost sales.” data-reactid=”29″>Similarly, there are heavy discounts on PCs powered by the GTX series cards. These older cards were recently updated with ray-tracing technology that was originally meant for its latest-generation chips. This provides further indication that NVIDIA is staring at stormy seas thanks to tepid end-market demand that’s forcing the company to run discounts to boost sales.
NVIDIA’s gaming business is its biggest source of revenue, with nearly 43% of total sales, so the company’s financial fortunes won’t turn around until this segment does. GPU sales will have to pick up the pace, but that looks unlikely right now because of ongoing trade tensions between the U.S. and China.
<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="More trouble ahead” data-reactid=”31″>More trouble ahead
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="There's a possibility NVIDIA could lose access to the Chinese market if things go south. RBC analyst Mitch Steves told Business Insider: "A major concern here, the products would be deemed mission-critical and the US would prevent shipments to China, or tax them heavily … "” data-reactid=”33″>There’s a possibility NVIDIA could lose access to the Chinese market if things go south. RBC analyst Mitch Steves told Business Insider: “A major concern here, the products would be deemed mission-critical and the US would prevent shipments to China, or tax them heavily … “
China was expected to play a critical role in the GPU market’s recovery following the cryptocurrency hangover. For NVIDIA, this would have turned out to be a nice tailwind, because China is its second-largest market. But if the trade tensions continue rising and there’s uncertainty about the fate of NVIDIA’s Chinese business, there’s a good chance that the company’s outlook won’t be to Wall Street’s liking.
<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Margin woes” data-reactid=”35″>Margin woes
Discounted graphics cards are expected to take a big toll on NVIDIA’s margins and profitability. Analysts expect the company’s earnings to drop to $0.79 per share in the first quarter, down from $2.05 per share a year ago. Analysts expect NVIDIA’s full-year earnings to come in at $5.30 per share as compared to $6.64 last fiscal year.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="NVIDIA expects to deliver a non-GAAP gross margin of 59% for the first quarter, which would be a sharp drop over the prior-year period’s 64.7%. Lower margin levels and a sharp top-line drop would ensure massive erosion in NVIDIA’s earnings in the first quarter.” data-reactid=”37″>NVIDIA expects to deliver a non-GAAP gross margin of 59% for the first quarter, which would be a sharp drop over the prior-year period’s 64.7%. Lower margin levels and a sharp top-line drop would ensure massive erosion in NVIDIA’s earnings in the first quarter.
But what’s more concerning is that the situation could get worse if GPU demand doesn’t recover and NVIDIA fails to provide a sunny outlook, which could send investors into deep worry.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content=" More From The Motley Fool ” data-reactid=”39″> More From The Motley Fool
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA. The Motley Fool has a disclosure policy.” data-reactid=”47″>Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA. The Motley Fool has a disclosure policy.
Add Comment