Nvidia (NVDA) is set to report fourth quarter fiscal 2018 earnings results after Thursday’s closing bell. Unlike previous quarters, expectations are low. But there are reasons to suggest that too much pessimism surrounds the underlying business, which can still reward investors in 2019.
Citing weak demand in the Gaming and Datacenter businesses, the company in January cut its Q4 revenue guidance, which it says come below its previous forecast. CEO Jensen Huang cited an "extraordinary, unusually turbulent, and disappointing quarter.” This comes on the heels of its Q3 earnings and revenue miss. On the news NVDA shares, which was already under pressure, dropped an additional 13%.
Complicating matters, the cryptocurrency boom is over, which has caused excess inventory of its gaming chipsets, among other headwinds. But do these issues warrant the punishment the stock — now some 50% below their 52-week high — has experienced? Investors who have waited for a better entry point in these shares should consider this an opportunity. The company on Thursday will look to re-establish itself as the graphic chip powerhouse for which it has become known.
For the three months that ended December, Wall Street expects the Santa Clara, Calif.-based company to earn $1.40 per share on revenue of $2.7 billion. This compares to the year-ago quarter when earnings came to $1.78 per share on revenue of $2.91 billion. For the full year, earnings of $6.72 per share would rise 40% year over year, while full-year revenue of $11.83 billion would rise 21.8% year over year.
As noted, the company’s gaming segment, accounting for 55% of total revenues, has been soft. This is due to a slowdown in demand for older and newer gaming chips. Although Q3 Gaming revenues of $1.76 billion rose 13% year-over-year, it marked a 2% decline from the third quarter. And was also a considerable slowdown from the prior three quarters during which gaming revenue growth exceeded 50%.
Investors will look to see to what extent the gaming weakness has extended beyond the holiday quarter. The Street is expected Q4 gaming revenue to reach $1.02 billion, falling some 40% year over year. This should be offset by 14% rise in datacenter revenue, which is expected to reach $692.2 million, while professional visualization revenue are seen rising 20% year over year to $303.9 million. There won’t be any surprises there.
The only question weighing on the minds of investors in the guidance, given that the company is also dealing with oversupply and inventory issues. And if that weren’t bad enough, there’s the trade war between the U.S. and China that have raise concerns about chip makers. But it’s not time for panic. Nvidia CEO Jensen Huang spoke confidently even during the guidance cut, saying “Looking forward, we are confident in our strategies and growth drivers.”
In that vein, how the company guides for fiscal 2019 will tell investors how confident Huang really is. But with shares down some 30% since the Q3 report and performance expectations already so low, Nvidia could be headed for a rebound, assuming there is no more bad news to report.