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How this Impacts the View Forward for NVIDIA Corporation (NASDAQ:NVDA)

NVIDIA Corporation (NASDAQ:NVDA) shares were crushed on Friday following disappointing results on the top and bottom line and providing a disappointing outlook for next quarter. It was a clean sweep failure in this case and there’s no point in trying to put a positive spin on it.

However – and this is a big however – the stock has already been cut in half and has a secular growth thesis that is not really impacted by the drivers behind this flopped execution (which appears to be what happened here – poor management, poor maintenance of investor expectations, and very poor messaging to the Street).

NVIDIA Corporation (NASDAQ:NVDA) reported below-consensus third quarter earnings of $1.84 per share on a 20.7% yr/yr increase in revenue to $3.18 bln, which was also shy of expectations.

While the headline results were not that far away from consensus expectations, NVIDIA’s guidance for the fourth quarter didn’t meet expectations.

The company expects Q4 earnings between $1.32 per share and $1.49 per share on revenue between $2.65 bln and $2.75 bln. The earnings guidance range is based off the company’s gross revenue, gross margin, expense, tax rate guidance, and an assumption of a flat share count. Both guidance ranges are well below market expectations with NVIDIA’s revenue outlook representing a 20.0% shortfall to market expectations.

If there is any steering toward the harbor, it was the announcement of a 7.0% increase to its quarterly dividend (to $0.16) and a $7 bln increase to its buyback authorization, which is now at $7.94 bln.

So, here’s the story: NVIDIA blamed a glut of Pascal-based GPUs (GTX1000 series) for its revenue shortfall. Management noted that the normalization of prices of Pascal-based cards has taken longer than expected after last year’s volatility in the cryptocurrency market led to a shortage of cards and a surge in prices.

NVIDIA launched a new line of video cards for its gaming segment in late September. NVIDIA CEO Jen-Hsun Huang remained wildly optimistic when discussing the technological leap achieved in the RTX2000 series, but there is still very little content that takes advantage of the new technology.

That said, this will leave the Street with a bad taste. Most analysts expected the fallout from the gaming and mining congestion to be behind the company by now and not leak into 2019, which it appears it will.

Concerns about the future of NVIDIA’s gaming segment have overshadowed performance in most of the remaining segments, where the company saw strong yr/yr revenue growth. Professional visualization revenue jumped 27.6% to $305 mln; Datacenter revenue spiked 58.1% to $792 mln; Auto revenue grew 19.4% to $172 mln. OEM & IP revenue fell 22.5% to $148 mln. Revenue in the company’s largest segment—Gaming—increased 13.0% to $1.76 bln.

At the end of the day, the stock has been murdered over the past 6 weeks, and that likely isn’t over. But the market was apparently ahead of the analysts in spotting the traffic jam ahead. Hence, any further dramatic extension of the pullback following this report and guidance will likely represent an intermediate term opportunity for new money.

And hopefully they have learned a valuable lesson about managing expectations for what comes next.


Sell-Side Stomping

  • Riley FBR downgrades NVDA to Neutral from Buy (lowers their tgt to $190 from $240). The catalyst is a meaningful F3Q19 results miss and much more substantial F4Q19 guide lower versus their cautious preview, and an adverse impact to FY20’s Y/Y overall sales growth profile in firm’s updated model. Four factors drive the change. First, excess Pascal GeForce 1060 distribution inventory has triggered a -30%/-$500M F4Q19 Q/Q Gaming segment plunge, with FY19 sales now flat Y/Y versus a +34.3% T5-year average. Any GeForce Turing-based thesis now shifts into F2H20 in firm’s view. Second, Data Center growth persists, but Y/Y gains are steadily falling, with F4Q’s +37.0% Y/Y a 10-quarter low and with low-20’s or high-teens FY20 gains now likely in firm’s view. Third, on-hand inventory rose $327M/30.0% Q/Q so is up $620M/78% since F1Q19. Mix skews to Turing and other new products, but the steep gains amplify demand and growth concerns. Lastly, firm’s sector inventory correction concerns and expectation for multiquarter SOX volatility barring clear China trade or US interest rate improvement suggests more compelling entry points could emerge in the seasonally soft C1H19. Upside risks are sudden channel and on-hand inventory clearance, while downside risk are further sales slowing, continued dramatic valuation multiple compression or both.
  • Oppenheimer cuts tg to $250 from $310. They believe NVDA’s core DC/AI-driven secular growth thesis remains intact. They’re disappointed with the magnitude and duration of gaming/mining-related inventory correction.
  • BAML defends the stock
  • Stifel lowers tgt to $200 from $250
  • Nomura to $200 from $225
  • Goldman removed from Conviction Buy List
  • Wells Fargo lowers tgt to $235 from $315

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