It has been about a month since the last earnings report for Nvidia (NVDA). Shares have lost about 27.6% 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 its most recent earnings report in order to get a better handle on the important catalysts.
NVIDIA Q3 Earnings Lag Estimates, Guidance Bleak
NVIDIA third-quarter fiscal 2019 results recorded a year-over-year improvement but fell short of the Zacks Consensus Estimate.
The company's non-GAAP earnings per share came in at $1.84, surging 38% from the year-ago period while declining 5% sequentially. Also, the bottom-line figure missed the Zacks Consensus Estimate of $1.91.
Revenues improved 21% year over year to $3.18 billion. However, the top line lagged the Zacks Consensus Estimate of $3.24 billion. Moreover, it was lower than the management's projection of $3.25 billion (+/-2%). Although growth across Datacenter, Professional Visualization and Automotive segments was positive, weakness in the Gaming segment was a spoiler.
Moreover, due to excess inventory of midrange Pascal products caused by low demand from cryptocurrency induced the management to issue a soft guidance for the fiscal fourth quarter.
Revenues at the GPU business grew 25% year over year to $2.77 billion on the back of strong Datacenter, Professional Visualization and Automotive segments. Tegra processor revenues worth $407 million declined 3% on a year-over-year basis due to a fall in demand across the gaming consoles market.
Gaming revenues were up 13% on a year-over-year basis but dipped 2% sequentially to $1.76 billion. Sales of Turing-based GPUs and notebook sales aided a year-over-year improvement. Notebook gaming GPU sales soared 50% in China.
However, inventory level of midrange Pascal gaming cards remained higher-than-expected as demand from gamers failed to grow fast enough to offset the weak cryptocurrency-related demand. Consequently, shipment was badly hurt as the price of graphic cards remained elevated.
Nonetheless, during the quarter under review, the company began shipping its first gaming GPUs - GeForce RTX series - based on Turing architecture. Management believes that RTX is well-poised to establish itself "as a game-changing architecture", given the pipeline of upcoming games supporting the ray-tracing feature.
Meanwhile, revenues from Datacenter increased 58% year over year and 4% sequentially to $792 million, mainly fueled by strong demand for Tesla V100 server GPU and V100-powered DGX servers. Moreover, growth in the company's AI business backed by the Turing T4 Cloud GPU launch during the reported period was a tailwind. Notably, T4 received the quickest adoption of any server GPU and is available on Google Cloud Platform.
During the quarter under discussion, NVIDIA introduced an open-source GPU-acceleration platform called RAPIDS for data science and machine learning. The platform has already received a broad adoption from leading players like Oracle, Microsoft Azure, Google, Hewlett Packard Enterprise, IBM and SAP.
Moreover, NVIDIA RTX Server, launched in the fiscal third quarter, designed for photo-real rendering in the datacenter opens a new market for GPUs. Notably, it has been adopted by key developers such as Adobe, ANSYS, Autodesk and Dassault among others.
Additionally, the launch of NVIDIA TensorRT Hyperscale Platform in the quarter under consideration is expected to boost the deployment of its inference platform at scale in hyperscale datacenters.
Automotive revenues in the reported quarter totaled $172 million, reflecting a 19% rise year over year and 7% sequentially, banking on ramped up production of autonomous vehicle and AI-based smart cockpit infotainment solutions. Growing adoption of NVIDIA DRIVE AGX platform for autonomous driving systems among major car makers like Volvo, Continental and Veoneer is an upside.
Moving to Professional Visualization, revenues improved 28% year over year and 9% sequentially to $305 million. Management mentions that the expansion of these technologies across industries like public sector, manufacturing and architecture, engineering and construction is a key growth driver.
Per management, the company's Turing-architecture based GPUs - the Quadro RTX 8000, 6000 and 5000 - received a positive response from a wide range of customers including the major movie studios and game developers.
NVIDIA's non-GAAP gross margin expanded 130 basis points (bps) from the year-ago quarter to 61%, falling below its guidance. This decline in crypto-demand made the company incur a charge of $57 million for prior architecture components and chips, thereby adversely impacting its margins.
In dollar terms, non-GAAP gross profit came in at $1.94 billion, translating into an increase of 23.2% from the year-ago quarter.
Non-GAAP operating expenses escalated around 28% from the year-earlier quarter to $730 million due to higher investment in growth areas including gaming, datacenter and automotive. As percentage of revenues, operating expenses were up 133 bps to 23%.
In dollar terms, non-GAAP operating income jumped 20.4% year over year to $1.21 billion. However, NVIDIA's non-GAAP operating margin was down from 90 bps to 38% in the quarter under review.
Balance Sheet & Cash Flow
NVIDIA exited the fiscal third quarter with cash, cash equivalents and marketable securities of $7.59 billion compared with $7.94 billion in the previous quarter. NVIDIA's long-term debt remained at $1.99 billion.
Cash flow from operations was $487 million compared with $913 million in the prior quarter. Free cash flow during the fiscal third quarter came in at $337 million, down from $785 million in the fiscal second quarter.
During the first nine months of fiscal 2019, the company returned approximately $1.13 billion in the form of share repurchases ($855 million) and dividend payouts ($273 million) to shareholders.
NVIDIA extended its dividend and share buyback program and also announced its plans to return an additional $3 billion to shareholders by the end of fiscal 2020.
The company's outlook for the fiscal fourth quarter indicates its suspension of mid-range Pascal GPU shipments in order to normalize channel inventory levels. Moreover, due to the normal seasonal build cycle, the company anticipates lower sales of Tegra chips for game consoles to be an overhang on gaming revenues.
However, management is optimistic about expanding its addressable market with Turing and the recently launched software offerings. Moreover, growth opportunities in ray-traced gaming, rendering, high-performance computing, AI and self-driving cars are expected to remain as positives for the company.
For the quarter under review, NVIDIA anticipates revenues of $2.70 billion (+/-2%). Non-GAAP gross margin is projected to be 62.5% (+/-50 bps). Non-GAAP operating expenses are forecast to be $755 million. GAAP and non-GAAP tax rates are envisioned at 8% (+/-1%) each.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -33.8% due to these changes.
Currently, Nvidia has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Nvidia has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.