NVIDIA Tries to Pin Sales Slowdown on China, but Is That Legit?

Check out the latest NVIDIA earnings call transcript.

Chip giant NVIDIA (NVDA 3.54%) will deliver its next quarterly report on Feb. 14, but there was no love in the markets for its recent guidance cut. The company now says it expects revenue in the neighborhood of $2.2 billion, down from $2.7 billion. But while management was pointing the finger at China's economic slowdown, there are other factors in play.

In this segment from MarketFoolery, host Chris Hill and analyst Emily Flippen talk data centers, gaming, and yes, China, as they look for a more nuanced answer to what's really happening with the GPU powerhouse.

A full transcript follows the video.

This video was recorded on Jan. 28, 2019.

Chris Hill: We're going to start in China, then we're going to work our way back to the United States. It seems like almost every other episode of this month, China has entered the conversation in terms of the economic slowdown. Today, we get to add NVIDIA to the growing list of companies in the United States warning shareholders about China. NVIDIA reports earnings on Valentine's Day but came out this morning and said they expect quarterly revenue to come in around $2.2 billion. That's down from $2.7 billion. That's a drop. That's not just a step down, that's a drop. Shares of NVIDIA when we walked in the studio were down 12%.

Emily Flippen: I almost feel like, for NVIDIA, China is a scapegoat.

Hill: Really?!

Flippen: Yes! Without a doubt! There's definitely going to be a pullback in gaming revenue from China because China's regulations and current economic state, of course we're going to see negative effects. But think about how much they reduced that guidance. That's not an insignificant amount. If you look into that report more, not only is it China, where they tried to emphasize the most, but also their data centers. Their data centers aren't growing as much. That's a concern. My colleague Aaron pointed out that data centers should be the backbone of the company. That revenue shouldn't be as variable as your gaming chips.

So, I almost feel like, while they're trying to put the emphasis on China to make investors feel like, "Oh, maybe this will change in the near future when we see a turnaround in economic growth in China, this is just a temporary headwind," maybe there's something bigger underneath the covers here.

Hill: It's interesting. The reason I reacted that way is because, you and I were talking this morning about, what do companies blame when they miss on their earnings reports? We'll get into this a little bit more later in the show. The go-to joke is always about companies blaming the weather. Sometimes that's perfectly valid and sometimes it's not. But I feel like we've seen enough evidence out of China and enough companies talking about China to feel like the economic slowdown is real.

Now, to your point, if there's more going on in the case of NVIDIA, then yeah, that absolutely could be a situation where they're taking a number of challenges that they're facing and lumping them all in China. But China's on the list for them.

Flippen: Without a doubt. I don't want to downplay the importance of the economic slowdown in China. It's going to negatively affect a lot of companies. I'm a huge investor in Chinese stocks, so unfortunately, I'm all too familiar with what an economic slowdown for China means. NVIDIA also doesn't just have exposure to a general economic slowdown, they have exposure to regulatory hurdles that they're going to face in terms of the demand for games in China in a regulatory environment that isn't very supportive of gaming right now, especially for the younger generations. There are a lot of headwinds for NVIDIA. I just think, whenever I see reports coming out like this, when there's such a drastic change and they really try to emphasize one point that's a very, very salient point, but then they downplay what could be the larger issue boiling underneath the surface...So, without a doubt, definitely has something to do with China. But it also wouldn't be as lenient as to say that's the only thing affecting NVIDIA right now.

Hill: And now we can add this to the list of conference calls that are going to be interesting to listen to, and what kinds of questions management faces, particularly about the data centers. Obviously, there'll be a lot of focus on China, as well.