Driven by prolonged supply chain headwinds, semiconductor stocks such have struggled for most of the year, taking Nvidia (NVDA) towards 52-week low levels. Despite the company establishing a reputation as the best of the bunch, the stock has fallen 40% year to date and 10% over the past year.
During that span, the chip giant has executed as well as macro economic condition and supply chain headwinds would allow, posting thirteen straight earnings beats, suggesting the decline in the stock could be a buying opportunity. The semiconductor specialist will report second quarter fiscal 2022 earnings results after Wednesday’s closing bell. Investors will get a glimpse of what the next quarter and full year will look like when analysts speak to management.
The company’s weak outlook has put a damper on its growth expectations, causing a 10% plunge in the stock after it warned of disappointing Q2 gaming revenue. Surprisingly, Nvidia's revenue projection were not only below Street expectations, but it suggests little-to-no growth at all. While this might represent a solid buying opportunity for the stock, there’s still the question of when will it bottom out. Analyst Tristan Gerra of Baird who rates the stock as Neutral with a $150 price target, does not expect an immediate recovery.
"While the sharp and below-expectation slowdown in data center revenue in the quarter was due to supply chain disruptions, according to Nvidia, we model slowing [year-over-year] and [quarter-over-quarter] comps ahead," Gerra wrote in a note to clients. The entire chip industry has also suffered a decline in average selling prices, which analysts believe will impact the company’s gaming revenue and datacenter revenue. To reverse the stock's decline the company on Wednesday will need to talk positively about its growth prospects for the next quarter and beyond.
For the three months that ended July, Wall Street expects the Santa Clara, Calif.-based company to earn 49 cents per share on revenue of $6.7 billion. This compares to the year-ago quarter when earnings came to $1.04 per share on revenue of $6.51 billion. For the full year, ending in January, earnings of $3.74 per share would decline 16% year over year, while full-year revenue of $29.34 billion would rise 9% year over year.
The bearishness in the stock has driven by the company’s pre-announcement which revealed a meaningful deterioration of business fundamentals, particularly in the graphics unit. The company’s Gaming segment, meanwhile, is expected to see a revenue decline of more than 30%. Aside from weak PC sales, the entire sector has suffered from weak average selling prices. Nvidia’s expected decline in Q2 revenues and gross margins were notable in how quickly the stock had fallen.
The weak gross margins has taken down Nvidia’s earnings growth estimates significantly, which once hovered near 30% in Q4 to an 16% expected decline. Likewise, the projected full-year revenue growth of 9% is down from 60% growth in fiscal 2021. In other words, Nvidia has been a victim of its own success. The market wants to see how Nvidia management plans to pivot. In the first quarter, the company beat on both the top and bottom lines, earnings $1.36 per share on $8.28 billion in revenue, driven by record revenue from Gaming and Datacenter segments.
However, the company’s weak guidance was the first sign of struggle as it forecasted Q2 revenue to reach $8.1 billion significantly below the $8.44 billion analysts had forecast. That guidance sent the stock falling more than 10%. As such, the guidance on Wednesday will be the key factor in the stock’s near-term direction.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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