Nvidia Q2 Earnings Are Not What They Seem To Be
Summary
- Nvidia results suggest that the company pulled in substantial amount of revenue in to Q2 to make the quarter.
- The soft Q3 guidance is primarily a result of the Q2 pull in.
- While Nvidia is a terrific company, with the crypto tailwind gone, it is now on a lower growth trajectory and overvalued.
Nvidia (NASDAQ:NVDA) met its Q2 guidance of $3.1B +/- 2% and Gross Margin guidance of 63.3%/63.5% - right on the money it would appear. Operating expenses were also in-line. Tax expense came in 4% below guidance and was the key driver of the earnings upside. (all images from Nvidia CFO commentary)
But, appearances can be deceptive.
From a segment level, as expected, the OEM&IP segment took a big hit and was down 70% to $271M (image below). However, on a surprising note, gaming revenue at $1.8B came in much stronger than what we expected.
When it comes to cryptocurrency, CFO commentary says that:
However, this commentary is misleading. It does not point to total crypto exposure but only shows the impact on "crypto specific products". As we discuss below, it appears that Nvidia had about $600-700M of total crypto degradation across its OEM&IP and Gaming product lines.
Firstly, we note that the gaming growth shown during the quarter is not credible. When you have a 70% drop in the OEM and IP segment due to crypto, management wants investors to believe that gaming actually strengthened. This is not possible because a sizable amount of crypto cards are bought through "gaming" GPUs. Checks throughout the quarter have shown deteriorating ASPs for Nvidia gaming cards which have been increasingly used of late for crypto mining. GPU AIB vendors have also posted significant revenue drops for Q2. Is it possible that Nvidia gaming revenue grew in spite of this clear crypto headwind?
We do not believe so. What appears to have happened here is that Nvidia pulled in a substantial amount of revenue from Q3 to Q2 to make the quarter. This view is backed up by several key metrics:
- Nvidia Q3 guidance of $3.2B is essentially flat. In a quarter where the company should see a strong back-to-school demand, management is guiding for very little growth. A pull in of revenues from Q3 to Q2 can do this.
- Nvidia inventories jumped from $797M to $1090M - a massive jump considering Q1, Q2, and Q3 appear to be flattish quarters. That is about 21 days of inventory jump. This shows the softness of sales and makes the growth shown in gaming as likely extremely dubious.
- And, most importantly, Accounts Receivables jumped from $1220M to $1662M - a massive jump of DSO from 35 to 48 days.
The bottom line here is that, there is extremely strong evidence here to say that Nvidia pulled in about 2 weeks' worth of revenues - around $400M - to make the quarter happen. Without this pull-in Nvidia would have missed the quarter by the proverbial country mile.
On the flip side, without this maneuver, Nvidia would have guided for a seasonally strong Q3.
With the crypto magic is gone, Nvidia's guide suggest that the Company's growth is now more likely in the 40% region instead of the previously assumed 50%+ region.
In addition to lower growth, the Company is also guiding toward a lower gross margin. We suspect that there are two reasons for this:
- Crypto customers were buying a richer product mix and now that demand is gone.
- Lack of crypto demand also means lower GPU demand across the board leading to slightly lower margins.
Lower growth rate coupled with lower margins is a significant headwind for Nvidia. We see this as big change in the company's growth narrative and consider the company's current valuation out-of-line with growth expectations. We see that stock falling steeply with the adjusted growth narrative.
Our view: Sell
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This article was written by
Author of Beyond the Hype, a comprehensive emerging technology stock analysis and discussion service on Seeking Alpha Marketplace. Currently, we focus on identifying and investing in the semiconductor, renewable energy, storage, EV, autonomous vehicle, CPU, and GPU markets.
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