Nvidia Stock Fell Due to Lower Revenue Outlook

Nvidia (NVDA) reported upbeat earnings results for the third quarter of fiscal 2020 on Thursday after the market bell. The third quarter ended on October 27. The company posted better-than-expected earnings and revenues in the third quarter. However, investors were disappointed by the company’s weak fourth-quarter guidance. Nvidia stock fell in the pre-market trading session today due to the company’s lower-than-expected outlook. The stock price fell 0.27% today at 6:01 AM ET. Nvidia stock also opened lower today. So far, the stock has fallen by more than 1% at 9:38 AM ET.

The stock closed 0.58% higher on Thursday at $209.79. At the closing price, the market capitalization is $127.76 billion.

NVIDIA’s Q3 earnings and revenues 

The company reported an EPS of $1.78 in the third quarter, which beat analysts’ estimates of $1.57. Although the earnings fell 3.3% YoY (year-over-year), they grew around 43.5% from the previous quarter. Nvidia’s lower revenues and operating income led to a drop in its third-quarter earnings.

Nvidia’s revenues of $3.01 billion beat analysts’ estimates of $2.91 billion in the third quarter. Although the company’s revenues fell more than 5% YoY in the third quarter, they improved 16.7% from the previous quarter. Notably, the revenues have fallen YoY in the past four consecutive quarters after delivering double-digit revenue growth for 13 quarters. Meanwhile, the company sold excessive inventory that wrote off previously.

In a press release on Thursday, NVIDIA CEO Jensen Huang said that the “gaming business and demand from hyperscale customers powered Q3’s results.” He also said, “We extended our reach beyond the cloud, to the edge, where GPU-accelerated 5G, AI and IoT will revolutionize the world’s largest industries.” We think that the company’s efforts to focus on the high-growth segments are bearing fruit. Nvidia’s earnings and revenues have improved sequentially for three consecutive quarters.

How did the segments perform in Q3?

We noted that Nvidia has been struggling with weak demand in its gaming and data center segments since last year. In the third quarter, the company’s gaming segment posted lower revenues. The loss of cryptocurrency demand continued to hurt gaming revenues. Notably, gaming revenues fell 6% YoY to $1.66 billion in the third quarter. However, the revenues beat analysts’ forecast of $1.54 billion.

During the quarter, Nvidia partnered with Microsoft (MSFT) through Minecraft video games to expand its ray tracing technology. The company also announced SUPER versions of GeForce GTX GPUs for gamers on October 29. Nvidia launched GeForce RTX SUPER graphic cards for the high-end market. The company’s RTX Broadcast Engine would use the AI capabilities of GeForce RTX GPUs. Nvidia also announced two new models of the SHIELD TV streaming media player during the quarter.

The company’s data center segment delivered revenues of $726 million in the third quarter, according to a CNBC report. The data center revenues fell 8.3% YoY and lagged analysts’ estimates of $754.2 million. According to Nvidia’s 10Q filings, the data center revenues fell 12% YoY in the first half of fiscal 2020 due to sluggish demand for its GPUs.

Among many launches and collaborations, Nvidia inked a new deal with Microsoft to develop the Microsoft Azure Data Box Edge hardware product, which has Nvidia’s T4 GPUs. The company also partnered with VMware to boost VMware cloud on Amazon’s AWS using T4 GPUs. The United States Postal Service also uses Nvidia’s AI technology to increase its package data-processing efficiency.

In the third quarter, the professional visualization segment generated revenues of $324 million, which beat analysts’ estimates of $315.4 million. During the quarter, the company announced over 40 applications powered by RTX ray tracing technology.

Outlook for Q4

For the fourth quarter, Nvidia expects its revenues to grow 34% YoY and reach $2.95 billion, plus or minus 2%. Analysts forecasted the fourth-quarter revenues at $3.03 billion. The company expects the data center business to improve sequentially in the January-ending quarter. Intel (INTC) is also focusing on its data-center business.

Nvidia expects its adjusted gross margins to reach 64.5% in the fourth quarter—plus or minus 50 basis points. The company expects operating expenses of $805 million in the fourth quarter. Analysts anticipate higher operating expenses of $768 million during the same quarter.

Nvidia is suffering due to US-China trade war uncertainties, which put its pending acquisition of Mellanox Technologies (MLNX) at risk. The Mellanox deal still needs regulatory approval from authorities in Europe and China. As a result, the company hopes that the prolonged trade war will end soon. The trade deal would help the Mellanox acquisition. Initially, the company expected to complete the transaction by the end of the calendar year. However, Nvidia thinks that the deal could close in early 2020. The deal would help the company expand its reach in the data center market. Nvidia plans to resume its share buyback program after completing the acquisition.

Analysts’ recommendations after Nvidia’s Q3 earnings

Among the 40 analysts tracking Nvidia, 28 recommend a “buy,” nine recommend a “hold,” and three recommend a “sell.” Analysts have an average target price of $214.68, which is at a premium of 2.3% based on Thursday’s closing price. Since the company’s third-quarter earnings results, many analysts have raised their target prices on the stock.

We think that Nvidia is recovering from the slump it faced last year due to the crypto bubble burst. The company has improved in every quarter across all of its segments, which shows that the downturn has ended. The stock has high growth potential and could rally more after the trade deal.

However, Nvidia would continue to face competition from Advanced Micro Devices (AMD) in the GPU space. AMD’s upcoming Navi processors, which are dubbed as the “Nvidia killer,” might take a toll on the company’s GPUs.