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NVIDIA Could Make a Big Move When It Reports Earnings

Danny Vena, The Motley Fool

It's been a roller coaster of a year for investors in NVIDIA (NASDAQ: NVDA). The stock reached all-time highs early last month, before losing more than a third of its value in the weeks that followed. The culprit appears to have been fears about a slowing in the semiconductor industry, a concern that seemed to be validated after competitor Advanced Micro Devices reported disappointing growth in its third quarter.

Investors are hoping that NVIDIA will have better news when it reports the financial results of its fiscal 2019 third quarter after the market close on Thursday, Nov. 15. Let's look at the company's recent quarter, and see if it provides any insight into what investors can expect when the company reports earnings.

NVIDIA's Quadro RTX 8000 graphics card, surrounded by metal balls of various sizes

NVIDIA's Quadro RTX 8000 with ray-tracing technology. Image source: NVIDIA.

Continuing stellar growth

For its fiscal second quarter (which ended July 29), NVIDIA reported revenue of $3.12 billion; this was an increase of 40% year over year, surpassing the high end of analysts' consensus estimates of $3.11 billion and topping the midpoint of management's guidance. Earnings per share of $1.76 soared 91% year over year, easily topping analysts' expectations of $1.66.

Gaming continues to earn the lion's share of NVIDIA's sales, contributing $1.81 billion, up 52% year over year. Data center revenue -- used in cloud computing and artificial intelligence (AI) cases -- soared 83% to $760 million, and now represents 24% of the company's total sales. The company's smaller segments, professional visualization and automotive, grew to $281 million and $161 million, respectively, up 20% and 13% year over year. Declining demand for chips used in cryptocurrency mining hit the OEM and IP (original equipment manufacturers and intellectual property) segment, which fell to $116 million, down 54% compared to the prior-year quarter.

Next-gen graphics

NVIDIA recently released next-generation graphics cards based on its Turing architecture, which will produce growth in both the gaming and professional visualization segments. These high-end Quadro processors boast the company's new ray-tracing technology, which recreates the path light rays take from their origin to the viewer, creating much more advanced and lifelike graphics. It has even been called "the holy grail" of gaming.

Because of the limited number of video games that currently employ the new architecture, it may be some time before NVIDIA reaps the benefits of its cutting-edge technology. Video game publishers will need six to 12 months to incorporate this new tech into their upcoming titles. Expect an update from the company on demand for the new chips.

A rendering of metal and glass balls inside a multicolored box with various light sources, demonstrating NVIDIA's ray-tracing technology

NVIDIA's cutting-edge ray-tracing technology. Image source: NVIDIA.

What the quarter may hold

For the upcoming third quarter of fiscal 2019, NVIDIA is forecasting revenue of $3.25 billion (plus or minus 2%), which would represent year-over-year growth of 23% at the midpoint of its guidance. The company is also anticipating gross margin of about 62.7% and operating expenses of $800 million at the midpoint of its guidance. NVIDIA doesn't provide earnings-per-share estimates.

Wall Street typically follows NVIDIA's lead when it comes to assessing the coming quarter. Analysts' consensus estimates are calling for revenue of $3.24 billion and earnings per share of $1.71, which would represent year-over-year growth of 22.9% and 28.6%, respectively -- with revenue near the high point of management's guidance.

If NVIDIA's forecast comes to pass, it would be the slowest level of revenue growth the company has seen in more than two years. Note that NVIDIA recently warned it would no longer include any contribution from cryptocurrency in its outlook, as demand for cryptocurrency mining appears to be waning. Additionally, the company tends to issue conservative guidance that it rarely misses, so it may be erring on the side of caution.

Another factor that may impact NVIDIA is China's recent freeze on video game approvals, the result of a regulatory shakeup and the Chinese government calling for limits on the amount of time that children spend on video games.

While the company has historically sported a rather frothy valuation, the recent correction has left the trailing-12-month price-to-earnings ratio below 30, its lowest level since early 2016. This is nearly bargain territory for NVIDIA shares.

Some final thoughts

NVIDIA's graphics processing units are widely regarded as the industry standard, and the company continues to innovate, making it difficult for rivals to make headway. NVIDIA not only is achieving growth in its core gaming market, but also has significant opportunities in AI and self-driving cars. And its professional visualization segment will also benefit from the new Turing-based architecture for computer-generated imagery (CGI) in movies and video games.

With that much going for it, investors should stay the course, regardless of how NVIDIA's stock moves in the wake of its earnings report.

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Danny Vena owns shares of Nvidia. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy.