Nvidia (NVDA): Once-Loved Stock Has Become a ‘Show Me’ Story
By Gene Munster
Shares of Nvidia (NVDA) are down 18% after the company lowered its guidance for the fourth quarter. Full Jan-19 results will be reported on February 14th.
- Nvidia pre-announced Jan-19 results 19% below the Street. ($2.7B to $2.2B). This miss is particularly concerning, given when Nvidia reported Oct-19 results, the company lowered Jan-19 guidance by 15% below Street expectations. Effectively, the company has missed the Street’s original Jan-19 expectations by 35%.
- The cause of the miss was primarily related to three factors: 1) China macro, 2) lower consumer demand for the new high-end Turing architecture GPUs, and 3) datacenter customers in this segment have shifted towards a more cautious approach to datacenter upgrades.
- Over the next year, investors will treat Nvidia as a “show me” story. Given the severity of the slowdown, we believe there continues to be risk to the 2019 Street estimates. That said, we believe longer-term (2+ years) the company will regain its footing and success as it builds the GPUs to ride three mega growth curves: gaming, datacenter, automotive.
Here’s what we’re looking for on the Jan-19 earnings call:
Nvidia needs to show investors that it has cleaned up existing channel inventory of mid-range Pascal graphics cards. The company initially lowered Jan-19 guidance due to excess channel inventory of these products, as it failed to understand the positive impact that cryptocurrency mining had on the segment. With the stark decline in cryptocurrency mining, sales of these products dropped, and the channels were stuck with high inventory levels. Nvidia said that it would take 1-2 quarters to clean up channel inventory. Based on today’s news, we don’t believe that Nvidia has accomplished this yet and believe that excess inventory will weigh on Apr-19 guidance.
When it comes to Nvidia’s new Turing architecture GPUs, the company needs more game developers to incorporate ray tracing and DLSS technologies into their games before we expect to see higher sales. While these technologies are foundational and offer a meaningful step forward in computer graphics, there isn’t a big incentive for consumers to upgrade to the latest architecture due to the lack of available content. Any concrete commentary on additional developers incorporating these technologies into future releases would be positive for Nvidia’s gaming segment, but likely won’t have an impact in the upcoming quarter.
Nvidia’s comments around Datacenter will be an important part of the call. Datacenter has been one of the highlights for Nvidia, growing from 12% of revenues in Oct-17 to 25% of revenues in Oct-19. While Datacenter growth has slowed, the segment grew 58% y/y last quarter. The Datacenter segment has been the bright spot over the last two years, but the company called out a weakness in the segment as part of the Jan-19 miss. The focus of the upcoming earnings call will be evaluating if there are structural challenges to the Datacenter opportunity.
Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio.