NVIDIA's Earnings Were Solid, but Stock Plunges 17% on Weak Outlook Due to "Crypto Hangover"

NVIDIA Corp. (NVDA 3.71%) reported fiscal third-quarter 2019 earnings after the market close on Thursday. The graphics processing unit (GPU) specialist's revenue increased 21% to $3.18 billion, GAAP earnings per share jumped 48% to $1.97, and EPS adjusted for one-time factors rose 38% to $1.84. 

Wall Street was expecting GAAP EPS of $1.71 and adjusted EPS of $1.93 on revenue of $3.24 billion, so NVIDIA beat the GAAP earnings consensus but missed on the adjusted EPS and top-line expectations. Revenue also fell short of the company's guidance of $3.25 billion plus or minus 2%.

NVIDIA stock plummeted 16.8% in after-hours trading on Thursday, which doesn't bode well for its performance on Friday. We can attribute the market's fury to the third-quarter misses just noted and -- more importantly -- to fourth-quarter revenue guidance coming in significantly lower than Wall Street was expecting. 

Indeed, I was disappointed, but not surprised. While writers for some other outlets had opined prior to the release that weak results and guidance were already priced into NVIDIA's stock (which had sank about 30% from its all-time closing high in early October), I wrote in my Wednesday earnings preview that it was "probably safe to predict, however, that the market won't be tempered in its reaction if NVIDIA provides more tepid fourth-quarter guidance than the Street is expecting."

Image source: Getty Images.

The key numbers

Data source: NVIDIA. GAAP = generally accepted accounting principles. YOY = year over year.

GAAP gross margin came in at 60.4%, up from 59.5% in the year-ago quarter, but down from 63.3% last quarter. Adjusted gross margin was 61.1%, up from 59.7% in the year-ago period, but down from 63.5% in the second quarter.

Data center continues to lead platform growth, with gaming faltering   

Data source: NVIDIA. *OEM and IP = original equipment manufacturer and intellectual property. YOY = year over year. QOQ = quarter over quarter.

Gaming's relatively anemic results were due to excess inventory of midrange Pascal-GPU-based graphics cards in the sales channel, management said on the earnings call. This situation is due to the cryptocurrency market bust, as some crypto "miners" had been buying the company's gaming cards to use for mining digital currencies, rather than buying its application-specific GPUs. In addition to sales of these cards to crypto miners falling off sharply, sales to gamers considerably slowed. Management attributes the latter largely to retail prices remaining at elevated levels for some time after the crypto boom ended. 

As with last quarter, OEM and IP revenue declined from the year-ago period due to the falloff in demand for application-specific GPUs for mining cryptocurrencies. This drop in demand is the result of crypto prices plunging earlier this year.

Data center continues to post strong growth thanks to continued robust sales of products based on the Volta GPU architecture, along with contributions from the T4 Cloud GPU based on the new Turing architecture. Data center growth is being powered by the rapid adoption of artificial intelligence (AI) and the fast growth of high-performance computing (HPC). Professional visualization's good results were driven by sales of products for both desktop and mobile workstations. Auto results were propelled by sales of infotainment modules, production DRIVE PX platforms, and self-driving-vehicle-system development agreements with auto companies.

What happened with NVIDIA since the last earnings release? 

• It launched the Turing GPU architecture, which is the world's first GPU that enables real-time ray tracing, a technique that promises to bring cinematic-quality images to video games and other applications.  
• In gaming, it began rolling out the GeForce RTX series, the first gaming GPUs based on the Turing architecture.
• In data center, it launched the T4 Cloud GPU and NVIDIA TensorRT Hyperscale Inference Platform "to deliver advanced acceleration for voice, video, image and recommendation services in hyperscale datacenters," the company said in the earnings release.  
• In data center, it launched the RTX Server, opening a new market for film rendering.
• In data center, it introduced RAPIDS, "an open-source GPU-acceleration platform for data science and machine learning."
• In pro visualization, it unveiled the Quadro RTX series, based on Turing.  
• In auto, it announced its "first Level-2 autopilot design wins with Toyota, Volvo, and Isuzu Motors." (On the Society of Automotive Engineers' 0-5 scale for levels of automation, Level 2 is an automated system that "takes full control of the vehicle (accelerating, braking, and steering)," though "the driver must monitor the driving and be prepared to intervene immediately," according to Wikipedia's definition). 
• In auto, it announced that "Continental and Veoneer, leading tier-1 suppliers, have each selected DRIVE AGX Xavier to power self-driving solutions to be offered early in the 2020s."

What management had to say

Here's part of what CEO Jensen Huang had to say in the earnings release:

AI [artificial intelligence] is advancing at an incredible pace across the world, driving record revenues for our data center platforms. Our introduction of Turing GPUs is a giant leap for computer graphics and AI, bringing the magic of real-time ray tracing to games and the biggest generational performance improvements we have ever delivered. 

Our near-term results reflect excess channel inventory post the cryptocurrency boom, which will be corrected. Our market position and growth opportunities are stronger than ever. 

A solid quarter, but a weak outlook due to "crypto hangover" 

Amid the market's wrath, investors shouldn't lose sight of that fact NVIDIA turned in solid Q3 results, with revenue and adjusted EPS growing 21% and 38%, respectively. These results speak to data center's power and the company's overall bench strength.

In the fourth quarter, NVIDIA guided for revenue of $2.70 billion, plus or minus 2%, representing a decline of about 7% year over year. Wall Street was expecting $3.4 billion in revenue in the fourth quarter -- hence the stock's whipping. The culprit for the soft outlook is an expected continuation of gaming's "crypto hangover," as Huang termed it on the earnings call. CFO Colette Kress said in the CFO commentary that management believes this is an "issue that will be corrected in one to two quarters." Indeed, there appears to be no reason for long-term investors to fear that NVIDIA's hangover from its relatively brief visit to "Cryptocurrencyville" will last much longer.

Nothing has changed with respect to the gaming market's rosy long-term growth projections or NVIDIA's position as the dominant supplier of graphics cards to gamers. Moreover, the company's growth opportunities from AI and driverless vehicles remain powerful.