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Nvidia (NVDA) Up 22.3% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Nvidia (NVDA). Shares have added about 22.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Nvidia due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

NVIDIA Q2 Earnings and Revenues Top Estimates

NVIDIA’s second-quarter fiscal 2020 non-GAAP earnings per share of $1.24 topped the Zacks Consensus Estimate of $1.15 but dropped 36% from the year-ago period. However, the bottom line improved 41% sequentially.

Meanwhile, revenues of $2.58 billion beat the Zacks Consensus Estimate of $2.55 billion but declined 17% year over year. However, the top line rose 16% sequentially.

The better-than-expected results can be attributed to strength in automotive, gaming plus OEM and IP end-markets. However, weaknesses in data center market were a spoiler.

Nonetheless, as the company witnessed a sequential progress across all its end-markets, management expects the business to have “normalized”.

Top-Line Details

Revenues at the GPU Business fell 21% year over year to $2.1 billion, reflecting deterioration in the gaming and data center GPUs. However, on a sequential basis, the metric grew 4%.

Tegra Processor Business revenues worth $475 million inched up 2% on a year-over-year basis and 140% sequentially, driven by higher Automotive revenues. However, lower shipments of SOC modules for gaming platforms were a dampener.

On the basis of market platform, Gaming revenues were down 27% on a year-over-year basis to $1.3 billion due to decreased shipments of gaming desktop GPUs and SOC modules for gaming platforms. However, the same was up 24% sequentially, backed by better SOC modules for gaming platforms, gaming notebook GPUs and GeForce RTX SUPER gaming GPUs.

Notably, the launch of Super line of gaming GPUs is making the management optimistic. The rising momentum in the games supporting the ray-tracing feature is a positive.

Meanwhile, revenues from Data Center deteriorated 14% year over year to $655 million as hyperscale customers witnessed soft sales from the segment. However, 3% sequential growth was generated from a rise in enterprise revenues, aided by expanding AI workloads.

Automotive revenues in the reported quarter totaled $209 million, reflecting a 30% year-over-year and a 26% sequential increase. This upside was boosted by autonomous vehicle development deals and the solid uptake of AI-based smart cockpit infotainment solutions. Most importantly, a new development service agreement, mostly with Volvo, has been a key driver.

Moving to Professional Visualization, revenues climbed 4% year over year and 9% sequentially to $291 million. Strength across mobile workstation products is a key catalyst.

OEM and IP revenues dipped 4% year over year to $111 million due to the absence of crypto-currency mining GPU sales. However, the same grew 16% sequentially owing to an uptick in shipments of embedded edge AI products.

Margins

NVIDIA’s non-GAAP gross margin contracted 340 basis points (bps) from the year-ago quarter to 60.1%. However, it expanded 110 bps sequentially, riding on lower component costs, automotive development services and a favorable Gaming segment mix.

Non-GAAP operating expenses escalated around 8% from the year-earlier quarter to $749 million due to increase in headcount, higher employee compensation and infrastructure costs.

In dollar terms, non-GAAP operating income tanked 38% year over year to $802 million. NVIDIA’s non-GAAP operating margin deteriorated to 31.1% in the quarter under review from 41.3% in the prior-year period.

Balance Sheet & Cash Flow

NVIDIA exited the fiscal second quarter with cash, cash equivalents and marketable securities of $8.47 billion compared with $7.8 billion in the previous reported quarter. The company’s long-term debt is flat at $1.99 billion.

Cash flow from operating activities was $936 million in the fiscal second quarter, up from $720 million in the sequential quarter.

Free cash flow came in at $823 million, up from $592 million in the earlier reported quarter.

The company did not make any stock repurchase in the quarter on account of its pending buyout of Mellanox. Management had earlier stated that the company is committed to returning $3 billion to shareholders through the end of fiscal 2020. During the fourth quarter of fiscal 2019, share buybacks worth $700 million were made and the company returned $195 million in the form of quarterly cash dividends in the first half of fiscal 2020.

The company intends to return the remaining $2.11 billion via a combination of share repurchases and cash dividends. However, management stated that no buyback can happen prior to the closing of the Mellanox buyout and thus, this phase may extend into fiscal 2021.

Guidance

For the fiscal third quarter, NVIDIA anticipates revenues of $2.9 billion (+/-2%).

Non-GAAP gross margin is projected to be 62.5% (+/-50 bps). Improvement in gaming product mix is likely to be a key driver. Non-GAAP operating expenses are forecast to be $765 million. GAAP and non-GAAP tax rates are envisioned at 10% (+/-1%) each.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, Nvidia has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Nvidia has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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