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NVDA - Recovering But Not Prospering Yet

|About: NVIDIA Corporation (NVDA), Includes: MLNX

NVDA beats lowered expectations.

Still facing some inventory headwinds.

Company will be steady.

With NVDA reporting earnings last week, it's time to take a look into what management has done to gain back investor trust after a few disappointing quarters, and tapering growth. As an owner of the shares, while this report is moving the company in the right direction, it isn't screaming buy for new investors, and doesn’t exactly spike my confidence in the stock.

Revenues of $2.22 billion for the quarter came in $20 million ahead of estimates. However, this is barely an impressive result when you consider that three months ago, guidance was terrible, sending estimates down $210 million between reports. In fact, just two reports ago, the street was looking for $2.89 billion this quarter, just to show how far expectations have fallen. The end result was a 31% year over year drop in revenues, show in the chart below. Blue (the * periods) represents current estimates.When it comes to guidance, a revenue forecast with a midpoint of $2.55 billion is fair, but again, it has to do with reduced estimates. Had this forecast been given just three months ago it would have looked terrible. There is some improvement coming, but it takes time for this to occur. Also, I still don't like the fact that inventory levels are up 79% year over year when the company is guiding to huge revenue declines. This isn't a very efficient way to manage your capital allocation. I've talked about bloated inventory for a couple of quarters now, and the situation has not dramatically improved.

NVIDIA CEO Jensen Huang in the earnings press release said that the company is on an upward trajectory. Well, it's kinda hard not to be when revenues are down more than 30% in the quarter. Also, if things are looking so bright moving forward, why did the company not buy back any stock during the period? In the year ago period, over $650 million was spent. Well, it has to do with the pending Mellanox (MLNX) acquisition, which at $6.9 billion takes up almost all of the company's current cash balance. With the stock down more than 45% from its all-time high, some investors might think that now is the perfect time to repurchase shares.

In the end, NVIDIA's Q1 report was okay, but I don't see it sending shares skyrocketing anytime soon. Headline beats and in-line guidance will mostly be the story, but that's only due to massive reduced expectations. The company is starting to turn around but it will be a few quarters before we see growth again, and the Mellanox deal's cash impact has stopped share repurchases for now. If the company isn't buying its own stock, should you be? There are certainly brighter days ahead, but this wasn't exactly a report that would make me want to rush in and buy the stock.

Disclosure: I am/we are long NVDA.