Graphic chip powerhouse Nvidia (NVDA) is set to report third quarter fiscal 2020 earnings results after Thursday’s closing bell.
With its shares surging 55% year to date and some 20% in thirty days, Nvidia on Thursday must go above and beyond to maintain its momentum, particularly given its valuation. Not only are shares trading near 52-week highs, it has a forward P/E of 54, which is more than twice the 19 P/E of the S&P 500 index. For some context, it is three more times expensive than Intel (INTC). Nevertheless, chip stocks have become the go-to sector on Wall Street as evidenced by the 50% year-to-date rise in the Philadelphia Semiconductor Index (SOX).
There’s no denying there is tons of optimism in the sector. In the case for Nvidia, however, three straight earnings beats have gotten investors exited about its business for graphics cards used not only in video games, but also due to the company’s exposure to multiple secular growth markets such as the data center, autonomous driving, artificial intelligence, among others. All told, a beat-and-raise quarter is priced into the shares, meaning Nvidia’s guidance will be what determines the direction of the stock.
For the three months that ended September, Wall Street expects the Santa Clara, Calif.-based company to earn $1.58 per share on revenue of $2.92 billion. This compares to the year-ago quarter when earnings came to $1.84 per share on revenue of $3.18 billion. For the full year, ending in December, earnings of $7.30 per share would decline 18% year over year, while full-year revenue of $10.78 billion would decline 8% year over year.
In the second quarter, the company beat on both the top and bottom lines. Q2 revenues of $2.58 billion topped consensus estimates by more than $30 million, while adjusted EPS of $1.24 beat by 9 cents. The concern for investors, however, is that revenues still declined about 17% from the previous year, while earnings declined by much more, despite the company's buyback program. This followed quarterly revenue declines of 31% and 17%, respectively, in the first two quarters.
On the positive side, gaming revenue came in above Street estimates, while auto revenues cruised by expectations. And although the data center came in a bit soft, dropping 14% year over year, Nvidia reported a hefty gross margin beat that helped boost the bottom line. This suggests, despite the recent downturn in chips, caused by the trade war, among other headwinds, the company is still finding ways to offset the pressure on profitability.
While the company’s guidance still shows revenues are not quite where they need to be (revenue is expected to be $2.90 billion, plus or minus 2%), it’s nonetheless encouraging that Nvidia realized not only inventory reduction during the quarter but also improving gross margins. On the Thursday analysts will want to see these positive trends continue. And assuming Nvidia can guide confidently for Q4 and beyond, the stock should maintain its upward climb.