NVIDIA (NVDA) stock soared 6% in today’s trading session as its Q2 earnings for fiscal 2020 beat estimates. However, its guidance missed estimates.

NVIDIA’s earnings results also sent stocks of rivals Advanced Micro Devices (AMD) and Intel (INTC) up 4.75% and 1.5%, respectively. Like NVIDIA, AMD also reported an earnings beat and a guidance miss—but its stock fell 10% post-earnings.

NVIDIA Earnings Revive Confidence: Is the Worst Over?

AMD and NVIDIA stocks had opposite reactions to similar earnings growth because of company-specific and macroeconomic factors. At the start of August, the US-China trade war escalated. President Trump announced a 10% tariff on the remaining $300 billion worth of Chinese imports. He later delayed tariffs on imports for mobile phones, laptops, video game consoles, and computer monitors. This tug-of-war between the two economies pulled down semiconductor stocks.

NVIDIA stock underperforms the semiconductor industry

NVIDIA stock fell 12% since July 31. This decline is double the VanEck Vectors Semiconductor ETF’s (SMH) decline of 12% and four times AMD decline of 3%. NVIDIA took a bigger hit as the company also suffered from a crypto bubble burst, slow uptake of its Turing GPUs (graphics processing unit), and rising competition from AMD. These three factors pulled NVIDIA stock down 45% from its all-time high of $292.76 in September 2018. At that time, NVIDIA investors had priced in strong double-digit earnings growth, which sent the stock over $290. When earnings began to fall, investors cashed their profits, sending the stock into a technical downtrend.

NVIDIA CEO Jensen Huang, in the latest earnings call, stated that the business has normalized. But this is a new normal with no extraordinary gains, as in 2017 and 2018. The stock has a long way to go to reach its September 2018 levels. NVIDIA is doing all the right things:

  • The company is expanding its market beyond gaming to adjacent markets like automotive, data center, and professional visualization.
  • It’s expanding its data center offerings by acquiring Mellanox.
  • It’s tapping new fast-growing markets of artificial intelligence and autonomous vehicles through partnerships.

NVIDIA Earnings Revive Confidence: Is the Worst Over?

NVIDIA earnings highlights

In the second quarter of fiscal 2020, NVIDIA’s revenue rose 16% sequentially to $2.58 billion, beating the analyst estimate of $2.5 billion. The sequential growth was driven by strong demand for laptop GPUs and game console processors. The quarter also included revenue from autonomous vehicle development agreements and NVIDIA Super RTX GPUs. This sequential revenue growth shows that things have started to normalize for NVIDIA after a 31% sequential decline and no growth in the last two quarters.

NVIDIA’s revenue is still down 17% year-over-year, as it converts the extraordinary gains from cryptocurrency to gains from other longer-term growth trends. The data center market remains subdued as hyperscalers continue to absorb their inventory.

This is NVIDIA’s third straight quarter of year-over-year revenue declines. After another quarter of declines, it’s likely to return to growth as one complete cycle of declines ends. In the fourth quarter of fiscal 2020, its base year will be the fourth quarter of fiscal 2019 when its revenue hits the bottom.

NVIDIA earnings guidance for the third quarter of fiscal 2020

For the third quarter of fiscal 2020, NVIDIA expects revenue to fall 8.8% year-over-year but rise 12% sequentially to $2.9 billion, lower than the analyst estimate of $2.97 billion. The sequential growth will be driven by strong demand from gaming as more and more games adopt ray tracing technology. Moreover, the launch of the Nintendo Switch Lite will drive demand for Tegra processors.

Trump has exempted video game consoles, laptops, and computer monitors from tariffs until December 15. If this exemption remains as stated, NVIDIA would benefit from holiday season sales. Moreover, Intel has addressed its CPU (central processing unit) supply shortage, which had limited NVIDIA’s sales of laptop GPUs over the last three quarters.

NVIDIA Earnings Revive Confidence: Is the Worst Over?

NVIDIA has refrained from giving full-year guidance amid macroeconomic uncertainty. Assuming fourth-quarter revenue is sequentially flat, its full fiscal 2020 revenue could fall 9.5% year-over-year to $10.6 billion. This is below its previous guidance of $11.16 billion, down 4.7% year-over-year. Even AMD lowered its full-year revenue guidance from high-single-digit growth to mid-single-digit growth. Intel lowered its full-year revenue guidance by $2 billion, or 1%, to $69.5 billion.

Profit margins rise alongside revenue

NVIDIA’s non-GAAP gross margin rose by 110 basis points sequentially to 60.1% in the second quarter of fiscal 2020. Its non-GAAP operating margin rose by 600 basis points to 31.1% as its revenue rose 16% while its operating expense fell 1% sequentially. Its non-GAAP earnings per share rose 41% sequentially to $1.24, beating analysts’ estimate of $1.15.

NVIDIA expects to complete its acquisition of Mellanox by the end of the third quarter of fiscal 2020. It plans to restart share buyback on successful completion of this acquisition.

Next six months interesting for NVIDIA and peers

These are tough times for the semiconductor industry. But sequential growth of NVIDIA, AMD, and Intel shows that worst is over. The three companies are set to witness seasonal sales in the second half, which should drive their revenue and profit margins. However, these figures are expected to come in lower than last year as the current year will include the impact of the escalated trade war.

The second half of the year is especially important for AMD. It’s looking to gain PC GPU market share from NVIDIA with its new Navi GPUs that compete in terms of price and performance.

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