Should Investors Worry about NVIDIA’s Gross Margin Guidance?

NVIDIA (NVDA) has reduced its fiscal 2019 fourth-quarter revenue guidance by $500 million to account for weak demand for its Turing-based RTX gaming GPUs (graphics processing units) and data center GPUs. Weak revenue will likely impact its profitability as well.

NVIDIA has lowered its non-GAAP (generally accepted accounting principle) gross profit guidance by $456 million to $1.2 billion. This decline includes a charge of $120 million for keeping an excess inventory of DRAM (dynamic random access memory) and other components. Micron Technology (MU), in its fiscal 2019 first-quarter earnings call, stated that its DRAM demand fell as graphics, enterprise, and cloud customers stored excess memory inventory over fears of a supply shortage.

NVIDIA’s non-GAAP gross margin is expected to fall to 56% in the fourth quarter of fiscal 2019 from the previously guided margin of 62.5%. Excluding the impact of high inventory of DRAM and other components, its gross margin is expected to fall to 61.36%. Other factors affecting NVIDIA’s gross margin include weak product mix as demand for its high-margin gaming and data center products slowed.

On the other hand, rival Advanced Micro Devices (AMD) reported a fourth-quarter gross margin of 41% in line with its guidance. The margin was driven by a higher mix of data center processors. NVIDIA’s gross margin will likely revive in one or two quarters as it absorbs excess DRAM inventory.

NVIDIA maintained its fiscal 2019 fourth-quarter non-GAAP operating expense guidance at $755 million. However, a significant decline in revenue and gross profit will reduce the base for operating expense, thereby reducing its operating profit guidance from $931.5 million to $477 million, equating to an operating margin of 21.7%. The revised guidance shows that operating profit will fall 60% YoY.

The decline in profit margins comes from a one-time memory inventory charge that should be absorbed as demand rises. NVIDIA’s long-term growth from secular demand in AI (artificial intelligence), autonomous driving, gaming, and visuals remain intact.

Next, we will see where analysts see NVIDIA in a year’s time.

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