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NVDA Is Not 20/20 About 2020

Summary

2020 guidance is likely to be sharply revised lower this year.

Q4 inventory accounting lifted net income of Q4 by 28%.

Ether protocol changes will push continue to pressure gaming revenue.

Why 2020 guidance is likely to be sharply revised lower this year.

"For fiscal 2020, revenue is expected to be flat to down slightly" states NVIDIA in its latest earnings release.

Let'd so simple math to check what it'll take to get there.

Q1 guidance is 2.2 bil.

Let's assume that gaming revenue will top at 1 billion per quarter as it was before crypto-mining mania started. 

Math:

11.7 bil - (2020 revenue target) - 2.2 bil (guided total revenue for Q1) - 3 * 1 bil (max assume gaming revenue for Q2, Q3, Q4) = 6.5 bil

this leaves 6.5 bil for non-gaming revenue in Q2, Q3, Q4, or on average 2.16 bil per quarter for non gaming revenue.

At its best quarter, non gaming revenue was 1.4 bil.

Given these assumptions, NVDA would have to grow all non gaming segments at 48% YoY. And this is at times when AMD gaining traction in Data Center sales and NVDA had 10% YoY quarterly growth in data center.

Q4 inventory accounting lifted net income of Q4 by 28%.

Now, let's take a look at creative accounting.

NVDA inflated earnings by putting record high inventory on balance sheet of 1575 mil. Last quarter it was 1417 mil and a year ago it was 796 mil (50% of this years quarter)

Thus QoQ there is 158 mil of recognized gross profit thanks to balance sheet trick with inventory. Represents ~30% of extra income in the last quarter.

Ether protocol changes will push continue to pressure gaming revenue

Further proposed changes to ether crypto mining protocol (proof of stake and reducing reward to miners) will continue to hurt gaming revenues.

At present, crypto mining rewards are its lowest (see sources). This will drive more high end GPUs of 2018 into secondary market at attractive prices and will hurt gaming revenue.

Sources:

https://nvidianews.nvidia.com/news/nvidia-announces-financial-results-for-fourth-quarter-and-fiscal-2019

https://s22.q4cdn.com/364334381/files/doc_financials/quarterly_reports/2019/Q419/Rev_by_Mkt_Qtrly_Trend_Q419.pdf

https://cointelegraph.com/news/ethereum-daily-mining-rewards-are-at-lowest-level-ever-reported

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. I have no business relationship with any company whose stock is mentioned in this article.