I was amused at some of the descriptions of NVIDIA (NVDA 3.71%) stock correcting 5.3% on Friday after the graphics chip maker released terrific fiscal second-quarter 2018 results -- revenue jumped 56% and adjusted earnings per share soared 91% -- after the market closed on Thursday. One would think the sky was falling in.
This is a stock that had returned nearly 55% in 2017 and 181% over the one year leading up to the earnings report. A correction of 5.3% in such a stock is akin to a ripple in a body of water that just experienced a massive wave. Friday's, ahem, "plunge" merely took the stock back to the level it was at just one month prior. After the post-earnings decline, NVIDIA stock has returned 46.5% and 168% in 2017 and over the last year, respectively, through Friday.
The scenario wasn't surprising: NVIDIA stock was priced for perfection going into earnings, so some short-term traders pulled the plug when the company didn't deliver what they considered a flawless report. NVIDIA blew by Wall Street's earnings estimates. The main reason for the stock drop was almost surely that revenue in the data center platform increased just 2% from the first quarter -- but there was a legitimate reason for this light sequential growth, as we'll get to in a moment.
Image source: Getty Images.
Key numbers
|
Metric |
Fiscal Q2 2018 (in millions except EPS) |
Fiscal Q2 2017 |
Change (YOY) |
|---|---|---|---|
|
Revenue |
$2,230 |
$1,428 |
56% |
|
GAAP operating income |
$688 |
$317 |
117% |
|
Adjusted operating income |
$773 | $382 | 102% |
|
GAAP net income |
$583 | $261 | 123% |
|
Adjusted net income |
$638 | $313 | 104% |
|
GAAP earnings per share (EPS) |
$0.92 | $0.41 | 124% |
|
Adjusted EPS |
$1.01 | $0.53 | 91% |
Data source: NVIDIA. GAAP = generally accepted accounting principles. YOY= year over year.
Adjusted numbers are the better numbers to consider, as the year-over-year comparisons are cleaner.
Wall Street analysts were looking for NVIDIA to post adjusted EPS of $0.70 on revenue of $1.96 billion. So NVIDIA crushed the earnings consensus and comfortably beat the revenue expectation. NVIDIA consistently cruises by Wall Street's estimates, so it seems more likely than not to me that analysts' forward estimates will also prove to be too low.
GAAP gross margin was 58.4%, up from 57.9% in the year-ago quarter, and down from 59.4% in the first quarter. Adjusted gross margin was 58.6%, up from 58.1% in the year-ago period, and down from 59.6% in the prior quarter. The slight declines from the first quarter are nothing to be concerned about, as they reflect the expiration of a licensing agreement with Intel.
Platform performance
Here's how NVIDIA's market platforms performed:
|
Platform |
Q2 Revenue (in millions) |
Change (YOY) |
Change (QOQ) |
|---|---|---|---|
|
Gaming |
$1,186 |
52% |
15% |
|
Data center |
$416 |
175% |
2% |
|
Professional visualization |
$235 |
10% |
15% |
|
Auto |
$142 |
19% |
1% |
|
OEM and IP |
$251 |
54% |
61% |
Data source: NVIDIA. YOY = year over year; QOQ = quarter over quarter.
Gaming's revenue growth was driven by the continued strong adoption of the company's Pascal-based GeForce GTX platforms and the success of the Nintendo Switch gaming console.
Data center's phenomenal year-over-year growth was "fueled by strong demand by hyperscale and cloud customers for deep learning training and accelerated GPU [graphics processing unit] computing, as well as demand for HPC, DGX AI [artificial intelligence] supercomputing, and GRID virtualization platforms," CFO Colette Kress said in the quarterly CFO commentary. The modest 2% quarter-over-quarter increase reflects that the company only recently began shipping its Tesla V100 platform, its first product based on its new Volta GPU architecture. The company announced this platform in mid-May, so it makes sense that some customers put off purchases of less powerful existing products.
Auto growth was driven (pardon the pun) by demand for infotainment modules, production DRIVE PX 2 AI platforms, and development agreements for self-driving cars. The DRIVE PX platform, which the company began shipping in the spring of last year, is a supercomputer for processing and interpreting the scads of data taken in by the various sensors about the surroundings of semi-autonomous and fully autonomous cars.
The OEM category got a boost from the recent rise in crypto coin prices, which resulted in increased demand for the company's GPUs for cryptocurrency mining. NVIDIA founder and CEO Jensen Huan said on the analyst conference call that he believes this application will remain a notable growth driver going forward.
What management had to say
Here's what Huang had to say in the press release:
Adoption of NVIDIA GPU computing is accelerating, driving growth across our businesses. Datacenter revenue increased more than two and a half times. A growing number of car and robot-taxi companies are choosing our DRIVE PX self-driving computing platform. And in Gaming, increasingly the world's most popular form of entertainment, we power the fastest growing platforms-GeForce and Nintendo Switch.
Nearly every industry and company is awakening to the power of AI. Our new Volta GPU, the most complex processor ever built, delivers a 100-fold speedup for deep learning beyond our best GPU of four years ago. This quarter, we shipped Volta in volume to leading AI customers. This is the era of AI, and the NVIDIA GPU has become its brain. We have incredible opportunities ahead of us.
Looking forward
NVIDIA's outlook for the third quarter is as follows:
- Revenue is expected to be $2.35 billion, plus or minus 2%. NVIDIA generated revenue of $2.0 billion in fiscal Q3 2017, so this outlook implies year-over-year revenue growth of 17.5%. Going into earnings, analysts had been projecting that NVIDIA would post revenue of $2.13 billion in the third quarter.
- GAAP and non-GAAP gross margins are expected to be 58.6% and 58.8%, respectively, plus or minus 50 basis points (or 0.5%). Both numbers represent a 20 basis point (0.2%) sequential improvement.
NVIDIA had a terrific quarter, and the long-term picture remains bright.
