NVIDIA Stock Plunges 14% on Lowered Q4 Guidance

Shares of NVIDIA (NVDA +2.44%) closed down 13.8% at $138.01 on Monday after the graphics chip maker ratcheted back its guidance for the fourth quarter of fiscal 2019, citing slowing global growth, particularly in China, and other factors.

This news probably felt like a sucker punch to the company's shareholders, as NVIDIA's quarterly guidance was already weak. Moreover, confidence in management was already shaken after last quarter's earnings release showed that management failed to project the magnitude of the "cryptocurrency hangover" that was coming.

NVIDIA's stock is now down 43.9% for the one-year period through Monday and is off a whopping 52.3% from its all-time closing high of $289.07, set on Oct. 1.

Here's what investors should know.

Two computer gamers at their desks and facing each other with people cheering each of them on -- concept for esports.

Image source: Getty Images.

NVIDIA's new guidance

Metric	Fiscal Q4 2018 Result	NVIDIA's Previous Q4 2019 Guidance	NVIDIA's Updated Q4 2019 Guidance	NVIDIA's Current Projected Year-Over-Year Change
Revenue	$2.91 billion	$2.7 billion, plus or minus 2%	$2.2 billion plus or minus 2%	(24.4%) at the midpoint of guidance. (Previous guidance was for a decline of 7.2% at the midpoint.)
GAAP* gross margin	61.9%	62.3%, plus or minus 50 bps**	55%, plus or minus 100 bps	(730 bps) at the midpoint.
Adjusted gross margin	62.1%	62.5%, plus or minus 50 bps	56%, plus or minus 100 bps	(650 bps) at the midpoint.

Data source: NVIDIA. *GAAP = generally accepted accounting principles; **bps = basis points, with one bps equal to one hundredth of one percent, or 0.01%.

NVIDIA doesn't directly provide earnings guidance, but we can calculate its ballpark earnings per share (EPS) expectation based upon the guidance it does provide (revenue, gross margin, operating expenses, other income and expenses, and tax rate). Investors can probably expect adjusted EPS to come in at about $0.77 -- that's a huge drop from the year-ago period's $1.72.

The culprits behind the weaker-than-expected gaming and data center results

Here's what NVIDIA had to say in its press release about gaming's revenue coming in lower than it expected:

In Gaming, NVIDIA's previous fourth-quarter guidance had embedded a sequential decline [in revenue] due to excess mid-range channel inventory following the crypto-currency boom. The reduction in that inventory and its impact on the business have proceeded largely inline with management's expectations. However, deteriorating macroeconomic conditions, particularly in China, impacted consumer demand for NVIDIA gaming GPUs. In addition, sales of certain high-end GPUs using NVIDIA's new Turing architecture were lower than expected. These products deliver a revolutionary leap in performance and innovation with real-time ray tracing and AI, but some customers may have delayed their purchase while waiting for lower price points and further demonstrations of RTX technology in actual games.

And here's what it had to say about data center's revenue coming in weaker than it projected:

In Datacenter, revenue also came in short of expectations. A number of deals in the company's forecast did not close in the last month of the quarter as customers shifted to a more cautious approach.

The data center explanation seems reasonable, but it seems that management shouldn't have been taken by surprise by all the factors it called out for gaming's lighter-than-expected showing.

Gross margins are expected to come in lower than management initially expected because the company is writing off about $120 million for excess DRAM (dynamic random access memory) and other components.

What's an investor to do?

First, let's put things in some perspective. While this is little consolation for new investors, NVIDIA stock remains a huge winner over the medium term. Shares have returned 389% over the three-year period through Jan. 28 -- eight times the S&P 500's return.

Data by YCharts.

Investors should ask themselves two questions when making investment decisions regarding NVIDIA:

Does the company's long-term growth story still seem intact?
Do I have confidence in top management?

If you can answer "yes" to both questions, you should hold your NVIDIA stock. As a shareholder myself, I can answer "yes" to the first question. The company is the leader or at least a major player in a number of powerful secular growth trends, including artificial intelligence (AI), computer gaming, and driverless vehicles.

My answer to the second question is a "yes -- but": Yes, I generally remain confident in top management's ability to lead the company, but they need to do a better job at forecasting. It seems top management either has not had as good a handle on their business and the macroeconomic climate as they should have had and/or they've been too Pollyanna-ish with a negative reality staring them in the face.