NVIDIA Stock Dives 15% as It Halves Its Q4 2019 Profit Guidance

NVIDIA lowers its fiscal 2019 fourth-quarter guidance

NVIDIA (NVDA), Advanced Micro Devices (AMD), and Intel (INTC) saw their stocks fall 15%, 7.5%, and 1.3%, respectively, at the start of the trading session on January 28 after NVIDIA lowered its earnings guidance for the fourth quarter of fiscal 2019 (which ended on January 27).

For the fourth quarter of fiscal 2019, NVIDIA has lowered its revenue guidance by $500 million from $2.7 billion–$2.2 billion, representing a YoY (year-over-year) fall of 24% and a sequential fall of 31%. This revised guidance reflects weak demand in the gaming and data center spaces.

NVIDIA Stock Dives 15% as It Halves Its Q4 2019 Profit Guidance

Gaming weakness

NVIDIA’s $2.7 billion revenue guidance already includes the impact of excess GPU (graphics processing unit) channel inventory following the cryptocurrency boom, which forced it to stall shipments of its midrange Pascal GPUs in the fourth quarter of fiscal 2019. Even though NVIDIA’s GeForce GTX 10 series channel inventory is almost sold out, it’s feeling the pinch of weakening macroeconomic conditions, especially in China (FXI), from which it earns ~20% of its annual revenue.

The US-China trade war is weakening consumer demand for NVIDIA’s GPUs, especially its high-end Turing-based RTX GPUs, which offer a ray tracing feature. The RTX GPUs have been facing slow adoption due to the lack of an ecosystem that can leverage ray tracing technology. Economic weakness has encouraged some consumers to delay their purchases of RTX GPUs until the technology becomes more widely available and RTX GPU prices fall.

Data center weakness

Last week, Intel stated in its December quarter earnings release that data centers had shifted from buying capacity to absorbing existing capacity, which had reduced its data center revenue growth. A similar trend was witnessed by NVIDIA, because of which many of its data center deals didn’t close in December 2018.

NVIDIA’s profit guidance

Low demand for high-end gaming and data center GPUs and excess memory chip inventory will likely significantly affect NVIDIA’s profit margins in the fourth quarter of fiscal 2019. NVIDIA expects its non-GAAP (generally accepted accounting principles) gross margin to contract to 56% in the quarter, down from its previous guidance of 62.5%. It expects its non-GAAP operating margin to contract to 21.7%, down from its previous guidance of 34.5%.

In dollar terms, NVIDIA halved its operating profit guidance from $931.5 million to $477 million, down 60% sequentially and YoY. It’s set to release its fiscal 2019 fourth-quarter earnings results on February 14.