Graphics chip leader NVIDIA (NVDA +1.67%) will report its fourth-quarter results after the market closes on Thursday. The company is dealing with a litany of problems that will put an end to its impressive growth streak, including excess gaming GPU inventory, weak sales of its latest graphics cards, a data center slowdown, and sluggish demand from China. The company's guidance is unlikely to be any better than its results.
What happened last time
NVIDIA kept up its double-digit growth in the third quarter, driven by all of its segments except OEM and IP.
|
Metric |
Q3 2019 |
Change (YOY) |
Compared to Average Analyst Estimate |
|---|---|---|---|
|
Revenue |
$3.18 billion |
20.7% |
Missed by $60 million |
|
Non-GAAP earnings per share |
$1.84 |
38.3% |
Beat by $0.13 |
Data source: NVIDIA.
Gaming revenue jumped 13% year over year to $1.76 billion, although it was down from the second quarter. Data center revenue rose 58% to $792 million, while professional visualization revenue increased 28% to $305 million. Automotive revenue was $172 million, up 19% year over year.
NVIDIA's results were entirely overshadowed by its guidance for the fourth quarter. The company predicted a decline in revenue amid the unwinding of the cryptocurrency bubble. It lowered that guidance in January, citing weak demand in China, sluggish sales of its expensive RTX 20 series graphics cards, and weakness in its fast-growing data center segment.
NVIDIA's Titan RTX graphics card. Image source: NVIDIA.
What analysts are expecting
NVIDIA expects its fourth-quarter revenue to come in at $2.2 billion, plus or minus 2%. That's down from its initial guidance of $2.7 billion and way down from the $2.91 billion in revenue it produced in the prior-year period.
|
Metric |
Average Analyst Estimate |
Change (YOY) |
|---|---|---|
|
Revenue |
$2.32 billion |
(20.2%) |
|
Non-GAAP earnings per share |
$0.91 |
(48.9%) |
Data source: Yahoo! Finance.
NVIDIA is working through excess channel inventory left over after the cryptocurrency bubble burst. At the same time, NVIDIA was too aggressive in raising prices on its recently launched RTX 20 series graphics cards. Add in an economic slowdown in China and data center weakness, and you have a recipe for a disastrous fourth quarter.
Check out the latest NVIDIA earnings call transcript.
Trees don't grow to the sky
NVIDIA has been an incredible growth story over the past few years, but a meaningful chunk of its gaming growth was a cryptocurrency-fueled mirage. The market for graphics cards is now normalizing, and it's hard to tell what NVIDIA's gaming growth will look like once that process is complete. The market hasn't been "normal" since early 2017, before cryptocurrency prices began surging.
NVIDIA's RTX 20 series is unlikely to be anywhere near as popular as its GTX 10 series, which has driven the company's impressive growth since it launched in 2016. The RTX 20 graphics cards provide smaller performance increases than their predecessors, making for a dubious value proposition for gamers.
NVIDIA's data center business still has long-term growth potential, but it was never going to grow at a 50%+ rate indefinitely. On top of slowing data center demand, NVIDIA will likely be facing more competition in the future. Graphics cards are popular for artificial intelligence workloads, but multiple cloud infrastructure providers are working on or already using custom AI chips that are more efficient than GPUs.
NVIDIA's first-quarter guidance may end up being downright awful if the company still has a bunch of channel inventory to work through. Another steep revenue decline is likely, and analysts are expecting fiscal 2020 revenue to be down slightly. That bakes in the assumption that NVIDIA's fortunes will improve drastically in the second half of the year. At the very least, the inventory headwind should be in the rearview mirror by then.
NVIDIA has gotten a lot of bad news out of the way already, but there probably won't be much to like about its fourth-quarter report.
