Expecting An Ugly First Quarter Earnings Call At Nvidia

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About: NVIDIA Corporation (NVDA), Includes: AMD, INTC
by: EnerTuition
Summary

Nvidia is likely to miss Q1 guidance in revenues and margins due to headwinds in the quarter.

Nvidia's FY2020 prospects are increasingly bleak and we expect fiscal year guidance to be reduced.

We continue to maintain that a valuation reset to $50 is in progress.

Nvidia (NVDA) Q1 earnings are on the tap for Thursday after close. Coming in to Q1, the company’s revenue splits have been as follows:

Management guided Q1 revenues to be at about $2.2B with margins of about 59%.

As such, we have been negative on Nvidia prospects due to the crypto burst and Advanced Micro Devices (AMD) and competitor market share gains. With these headwinds, Nvidia had a tough task of meeting its already low Q1 guidance. On top of this Nvidia has seen additional headwinds since the quarter started:

  • Datacenter, by all indications, is weaker than expected as Intel (INTC) results show.
  • While it appears that Nvidia has cleared the channel of high-end GPUs, the new RTX products needed unusual price cuts mid-way through the quarter.
  • There are indications that channel inventory at the low-end of the GPU market remains.

Consequently, we see Nvidia missing the already challenging Q1 guidance. Our expectation of Q1 revenue splits is as follows:

Gaming: $850M; Pro: $290M; Datacenter: $600M; Auto: $150M; OEM and IP: $110M

That brings Q1 revenue estimates to $2.0B – a $200M miss to guidance and consensus. We also expect that Nvidia had to sacrifice around 300 basis points in margin to get the sales to the $2B mark. As a result, Nvidia is likely to post a much bigger miss on the EPS front.

It's possible that Nvidia has made the quarter by shipping ahead as it has done in the past. If so, the balance sheet will show signs of strain. We will be watching.

While Q1 results will be interesting to see, the real risk to Nvidia equity lies in the guidance. Not only is Q1 looking anemic, the company faces several big headwinds for the rest of FY2020:

  • US trade war with China is likely to have a negative impact on FY2020
  • Low-end graphics inventory is likely to last through Q2 into Q3.
  • AMD continues to execute on its product roadmap and has now confirmed that Navi, a competitor in the mainstream GPU market, will be launching in Q3. This will make H2 FY2020 incrementally more challenging for Nvidia.
  • And, finally, in Q3, AMD is set to vanquish Intel at the high end of desktop and server CPU markets and AMD’s CPUs will drag along significant amount of GPU business that Nvidia would have otherwise garnered.

If our assessment is accurate, it's untenable for Nvidia management to retain its current FY2020 guidance. As such, it would be easy for management to blame the trade war and reduce the guidance now without having to acknowledge competitive challenges. Consequently, we now expect Nvidia management to drop FY2020 revenue guidance by about 10%. Analysts and investors will be hard pressed to have EPS much north of $4 with that guidance and downgrades are likely.

Such a move can push the stock well below its 52-week low around $127.

Looking forward, we expect investors to increasingly come to grips with the reality that:

  • Much of the hyper growth that fueled Nvidia valuation was not gaming but crypto and that segment is now largely irrelevant.
  • Nvidia has significantly less moat in both gaming and datacenter markets and is increasingly losing share to AMD.
  • Autonomous driving, the supposed next growth driver for Nvidia, remains a futuristic market with no prospects of significant near-term revenues.
  • Nvidia overpaid Mellanox and Mellanox will only help marginally with Nvidia growth challenges.

We continue to see the fair value of the company being closer to $50.

Disclosure: I am/we are short NVDA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Long AMD