On Wednesday evening, elite semiconductor designer and industry giant, Nvidia (NVDA) released the firm’s second quarter financial results. They were ugly.
Let us proceed. For the three month period ended July 31st, Nvidia posted adjusted EPS of $0.51 (GAAP EPS: $0.26) on revenue of $6.704B. Both the top and bottom lines disappointed already lowered expectations.
Revenue increased 3% year over year, a severe deceleration from 50%, 53% and 46% for the three months prior. As reported (GAAP), gross margin printed at 43.5%, down from 64.8%, while operating income dropped 80% to $499M on operating expenses that increased 36% to $2.416B. GAAP Net income decreased 72% to $656M.
On an adjusted basis, gross margin landed at 45.9%, down from 66.7%, while operating income dropped 57% to $1.325B on operating expenses that increased 38% to $1.749B. Adjusted net income decreased 51% to $1.292B.
Business Unit Performance
– Data Center generated revenue of $3.81B, up 61% y/y.
CFO Collette Kress acknowledged, despite growth, a disappointing quarter for the data center. North American sales were more than offset by decreasing sales to China, and the unit still suffered from supply chain disruptions.
– Gaming generated revenue of $2.04B, down 33% y/y.
During the call, CFO Collette Kress acknowledged a sharper than expected decrease in gaming GPU driven revenue. She also said she was unsure at this time of the magnitude of the impact upon this unit by decreasing demand for gaming GPUs by cryptocurrency miners.
– Professional Visualization generated revenue of $496M, down 4% y/y.
Kress said that a period of digestion was expected for this business after last quarter’s 50% growth. For the quarter increasing revenue driven by mobile was more than offset by a decrease in desktop driven revenue.
– Automotive generated revenue of $220M, up 45% y/y.
Kress believes that Q2 was an inflection point for automotive demand as the firm announced roll-out plans with five different manufacturers.
For the current quarter, Nvidia expects to see revenue of $5.9B (+/-2%), which is more than a cool billion (with a B) dollars less than the $6.95B that Wall Street was looking for. Both Gaming and Professional Visualization are expected to suffer sequential declines. These declines should be partially offset by growth in the Data Center and in Automotive.
In addition… GAAP and adjusted gross margins are expected to print at 62.4% and 65%, respectively (+/-50bps), GAAP and adjusted operating expenses are seen at roughly $2.59B and $1.82B, respectively. (That’s up from Q2.)
Nvidia ended the quarter with a net cash position of $17.037B, inventories of $3.889B, and total current assets of $27.418B. Current liabilities amount to $7.573B including $1.249B in short-term debt. This leaves Nvidia with a current ratio of 3.62 and a quick ratio of 3.11. By either metric, Nvidia’s current situation sparkles. However, a year ago, that current ratio was 6.65 and that quick ratio was 6.05.
Total assets add up to $43.476B including $6.408B in “goodwill” and other intangibles. At 14.7% of total assets, this is hardly abusive. Total liabilities less equity comes to $19.625B including $9.7B in long-term debt. Yes, Nvidia could pay off its entire debt-load out of pocket and get plenty of change back. We like that. We like this balance sheet. A lot. We do have to watch going forward though for further deterioration in the “current” picture, though the firm does have a long runway before there would be trouble.
I have found 13 sell-side analysts who are both rated at a minimum of four stars by TipRanks and have opined on NVDA since these earnings were released. After allowing for changes, among these 13 are 10n “buy” or buy equivalent ratings and three “hold” or hold equivalent ratings. The average target price across the 13 is $216.77 with a high of $320 (Hans Mosesmann of Rosenblatt Securities) and a low of $135 (Tristan Gerra of Robert W. Baird). Omitting the high and low as outliers, the average of the other 11 comes to $214.82.
I go back a ways with Nvidia. The stock has made me a lot of dough over the years. That said, business is business. Readers know that I exited the name two weeks ago, while reducing my exposure to Advanced Micro Devices (AMD) which is another long-time fave.
This was a poor quarter. The guidance is for another poor quarter. The economy is not a friend of the business right now. Global economics are also working against the stock as well. I truly believe that the data center and automotive are here to stay and will grow, if not like a weed, still grow during tougher times. That said, the metaverse (omniverse?) can wait for most firms/customers, gaming as a hobby will subside as folks become more concerned with being able to find work. Crypto mining is possibly gone as a driver of sales forever.
I think Nvidia is very well run. I think the world of CEO Jensen Huang. That said, 46 times forward looking earnings is a heck of a lot to pay for a company that can not grow in the near term like it has in the recent past. The stock, even on overnight weakness, is priced for accelerated growth. AMD and Marvell Technology (MRVL) , the two semiconductor stocks that I am still in, trade at 21 times and 22 times forward looking earnings, respectively.
At last night’s close, NVDA sat atop its 50 day SMA. That line has been support and will likely crack on the New York open. There is also a volume shelf at that level. Fail to quickly retake the 50 day SMA and that volume shelf will become resistance. I don’t need that. I need either a catalyst or a much deeper discount to re-enter NVDA on the long side anytime soon.