What Does NVIDIA's Future Look Like?

A man in a suit holding a tablet. An illustrated brain made of electrical connections depicting artificial intelligence hovers above the screen.

After disappointing guidance issued with its third-quarter earnings report in mid-November, shares of NVIDIA (NASDAQ: NVDA) have been severely punished. At one point up 50% on the year, the stock is sporting a 30% year-to-date loss as of this writing.

Much of the blame has been laid on the cryptocurrency mining bust early this year as NVIDIA underestimated how much pricing and inventory for its graphics processing units (GPUs) for gamers was affected by the mad dash to buy mining equipment in 2017. Management has said it could take a couple of quarters to work that extra supply down, resulting in the first negative trending numbers for the company in years.

Is it really that bad?

NVIDIA stock's big declines, paired with the company's rising profitability , have resulted in a trailing-one-year price-to-earnings ratio of 18.5, the lowest it has been since 2015. The one-year forward price-to-earnings ratio, based on Wall Street's estimates, sits at 19.3, implying a drop in the bottom line in the next year.

It's easy to understand why people are predicting a drop in the bottom line. During the third-quarter earnings report, the company's guidance for revenue in the fourth quarter was given at $2.70 billion plus or minus 2%; gross profit margin on sales is expected to be 61.7% to 62.8%; and operating expenses should be about $915 million. That compares to revenue of $2.91 billion, gross margin of 61.9%, and operating expenses of $728 million during the fourth quarter a year ago.

Given these expectations, gross margin is likely to be higher than it was in the year-ago period (likely because of the release of new ray-tracing-enabled GPUs offsetting the lower margin of old product sales), but the higher margin won't be enough to offset slightly lower sales and higher operating expenses. The company's estimates work out to operating income ranging from $720 million to $812 million, which is anywhere from 24% to 33% lower than the $1.07 billion hauled in a year ago.

Don't fear the cycle

Of course, business could wind up better than NVIDIA predicted, but the big forecasted drop in profits is nevertheless concerning, and it explains the ugly share-price action this year. Things may not be quite as bad as they look, though.

NVIDIA results are under pressure because of the video-game segment -- the company's largest at 55% of revenue in the last quarter. However, other end-markets, like data centers and automakers, remain in growth mode , and NVIDIA's new lineup of GPUs was just launched in the fall of 2018. It will take some time for NVIDIA's customers to fully utilize the new capabilities of those chips, but the company's track record for being a first mover in new technology has paid off in the past.

Thus, Wall Street's estimate that profits will be down in 2019, but not down for long as the bottom line rebounds later in the year. Expect some ugly numbers for a quarter or two, but as NVIDIA works off its gaming GPU inventory excess, the company should return to growth.

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Nicholas Rossolillo and his clients own shares of Nvidia. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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