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Nvidia (NVDA) Up 5.5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Nvidia (NVDA). Shares have added about 5.5% 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 the most recent earnings report in order to get a better handle on the important drivers.

NVIDIA Q1 Earnings & Revenues Beat Estimates, Up Y/Y

NVIDIA reported first-quarter fiscal 2021 non-GAAP earnings of $1.80 per share that beat the Zacks Consensus Estimate by 6.5% and surged a whopping 104.5% year over year. However, the bottom line declined 4.8% sequentially.

Adjusted revenues of $3.08 billion beat the consensus mark by 2.8% and surged 38.7% year over year. The top line, however, declined 0.8% sequentially.

Similar to peers like Intel and AMD, coronavirus outbreak negatively impacted NVIDIA’s first-quarter earnings results.

Supply-chain disruption as well as lower demand affected NVIDIA’s top-line. Shelter-in-place guidelines resulted in closure of retail outlets and China iCafes, which adversely affected sales of NVIDIA’s gaming products.

Moreover, demand for automobile infotainment system has been negatively impacted. Autonomous development infrastructure builds have also declined. NVIDIA expects the negative impact to continue for the next several quarters.

Notably, Intel also did not provided any guidance for 2020, citing business uncertainty and “limited visibility” pertaining to coronavirus crisis. Further, AMD noted weak demand environment induced by the coronavirus crisis.

Nevertheless, work from home, learn at home, and gaming drove a surge in e-tail demand, thereby benefiting NVIDIA.

Segment Details

Beginning first-quarter, NVIDIA started reporting revenues under two segments – Graphics and Compute & Networking.

Graphics includes GeForce GPUs for gaming and PCs, the GeForce NOW game streaming service and related infrastructure, and solutions for gaming platforms; Quadro GPUs for enterprise design; GRID software for cloud-based visual and virtual computing; and automotive platforms for infotainment systems.

Graphics accounted for 61.9% of adjusted revenues. The segment top-line figure increased 24.9% year over year but fell 8.5% sequentially.

Compute & Networking represented 38.1% of first-quarter fiscal 2021 adjusted revenues. The segment comprises Data Center platforms and systems for AI, HPC, and accelerated computing; DRIVE for autonomous vehicles; and Jetson for robotics and other embedded platforms. Mellanox revenues will also be included in this segment beginning second-quarter fiscal 2021.

Compute & Networking revenues jumped 69.2% from the year-ago quarter and 15% sequentially.

Market Platform Top-Line Details

Based on market platform, Gaming revenues (43.5% of adjusted revenues) were up 26.9% year over year to $1.34 billion owing to higher sales across the company’s major gaming products.

However, Gaming revenues were down 10.2% sequentially due to seasonally lower sales of GeForce desktop GPUs for gaming.

Per NVIDIA, stay-at-home is driving more than 50% increase in hours played on GeForce platform. The company expanded NVIDIA GeForce NOW during the quarter, which provides access to 650 games, with 1,500 more waiting to get on board. NVIDIA has added 2 million users since going live in February.

Revenues from Data Center (37% of adjusted revenues) soared 80% year over year and 17.9% sequentially to $1.14 billion. Growth was driven by strong demand from hyperscale and vertical industry end customers.

Professional Visualization revenues (10% of adjusted revenues) climbed 15.4% year over year but declined 7.3% sequentially to $307 million. Strength in desktop and notebook workstations drove year-over-year growth. Meanwhile, the sequential decline was attributed to lower sales of desktop workstations.

Automotive revenues (5% of adjusted revenues) in the reported quarter totaled $155 million, down 6.6% on a year-over-year basis and 4.9% sequentially, primarily due to lower legacy infotainment revenues.

OEM and Other revenues soared 39.4% year over year but declined 9.2% sequentially to $138 million. The year-over-year growth was primarily due to higher demand for entry-level laptop GPUs from PC OEMs. However, the sequential decrease was primarily attributed to seasonally lower sales of entry-level GPUs for PC OEMs.

Quarter Highlights

During the quarter, NVIDIA launched Minecraft with RDX as an open beta on Windows 10, bringing real-time ray tracing, more realistic materials and DLSS 2.0, the second generation of its deep learning neural network.

Additionally, more than 100 new laptop models powered by NVIDIA GeForce GPUs, were announced in the quarter. The company brought the RTX 2080 SUPER and RTX 2070 SUPER high-end GPUs to laptops for the first time.

For the Data Center end-market, the company introduced NVIDIA A100 data center GPU, the first based on the new NVIDIA Ampere architecture. Moreover, it introduced two products for the NVIDIA EGX Edge AI platform and the EGX Jetson Xavier NX.

The company also launched the NVIDIA DGX A100 - a 5-petaflops AI system that delivers elastic, software-defined data center infrastructure for the most demanding workloads.

Additionally, the company announced the release of NVIDIA Jarvis, a GPU-accelerated application framework that allows companies to use video and speech data to build advanced conversational AI services customized for their own industry, products and customers.

Moreover, the company supported Autodesk’s latest 3D visualization software, VRED 2021, with NVIDIA Quadro RTX. Additionally, NVIDIA introduced Quadro professional graphics to HP’s ZBook Create and ZBook Studio mobile workstation lineup.

Operating Details

NVIDIA’s non-GAAP gross margin expanded 680 basis points (bps) from the year-ago quarter to 65.8%, reflecting higher Data Center products and favorable GeForce GPU product mix. Higher Data center sales also helped the gross margin expand 40 bps sequentially.

Non-GAAP operating expenses grew 9% year over year and 1.4% sequentially to $821 million, driven by increased headcount, employee compensation and infrastructure costs.

Non-GAAP operating income surged 116.3% year over year to $1.21 billion. However, the figure declined 1.2% sequentially.

Balance Sheet and Cash Flow

As of Apr 26, 2020, NVIDIA’s cash, cash equivalents and marketable securities were $16.35 billion, up from $10.90 billion as of Jan 26.

Total debt, as of Apr 26, was $6.96 billion compared with $1.99 billion as of Jan 26.

Cash flow from operating activities increased 26.3% year over year but fell 38% sequentially to $909 million.

Free cash flow was $754 million, up 27.4% year over year but down 42.9% sequentially.

In the first quarter of fiscal 2021, NVIDIA paid dividends of $98 million. The company remains committed to paying its quarterly dividend.

Moreover, NVIDIA is evaluating the timing of resuming share repurchases and will remain nimble based on market conditions. The company is currently authorized to repurchase up to $7.24 billion in shares through December 2022.

Further, on Apr 27, NVIDIA announced the completion of its previously announced acquisition of Mellanox Technologies for a transaction value of $7 billion.

Guidance

For the second quarter of fiscal 2021, NVIDIA anticipates revenues of $3.65 billion (+/-2%), which includes low-teens percentage contribution from the Mellanox acquisition.

Non-GAAP gross margin is projected to be 58.6-66% (+/-50 bps). Non-GAAP operating expenses are expected to be $1.04 billion.

Capital expenditures are expected to be approximately $225 million to $250 million.

For fiscal 2021, non-GAAP operating expenses including Mellanox are expected to be $4.1 billion.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 6.26% due to these changes.

VGM Scores

At this time, Nvidia has an average Growth Score of C, a grade with the same score on the momentum front. 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 trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Nvidia has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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