NVIDIA Earnings: What to Watch on Thursday

NVIDIA (NVDA +3.97%) is slated to report its first-quarter results for fiscal 2020 after the market close on Thursday, May 16. 

The graphics processing unit (GPU) specialist is going into its earnings report surrounded by much investor uncertainty. Last quarter's results were a train wreck, with revenue falling 24%, earnings per share plummeting 48%, and EPS adjusted for one-time items plunging 53% year over year. The primary culprit was the gaming platform's big revenue decline, though data center's weak growth was a contributing factor. 

Moreover, another headwind is potentially on the horizon due to the United States' escalating trade war with China. Effective May 10, the Trump administration increased tariffs on $200 billion in Chinese goods from 10% to 25%, with China saying it's prepared to retaliate. This is troublesome as China is NVIDIA's second-largest market behind the U.S. 

In 2019, shares of NVIDIA have returned 26.6%, versus the S&P 500's 15.8% return. Nonetheless, as of Friday's close, the stock price is still nearly 42% lower than its all-time closing high of $289.36, set on Oct. 1, 2018. 

Image source: NVIDIA.

NVIDIA's key numbers

Here are the year-ago period's results and Wall Street's estimates to use as benchmarks. 

Data sources: NVIDIA and Yahoo! Finance. YOY = year over year.

Wall Street's estimates don't include any contribution from Mellanox, as this acquisition hasn't closed yet. In March, NVIDIA announced a $6.9 billion, all-cash deal to acquire the Israel- and Silicon Valley-based supplier of smart interconnect solutions and services for servers and storage. The transaction is expected to close by the end of the year. 

Platform performance

For context, here's how the platforms performed last quarter: 

DATA SOURCE: NVIDIA. *OEM AND IP = ORIGINAL EQUIPMENT MANUFACTURER AND INTELLECTUAL PROPERTY. YOY = YEAR OVER YEAR. QOQ = QUARTER OVER QUARTER.

Gaming: The only question is how bad results will be 

Last quarter, gaming's revenue plunged 45% year over year. Gaming is NVIDIA's largest platform -- it accounted for about 43% of total revenue last quarter -- so its results have a huge effect on the company's overall results. On last quarter's earnings call, CFO Colette Kress outlined the three main reasons for gaming's poor showing: 

First, post-crypto [post-cryptocurrency bust] inventory of GPUs in the channel caused us to reduce shipments in order to allow access channel inventory to sell through. We expect channel inventories to normalize in Q1...

Second, deteriorating macroeconomic conditions, particularly in China, impacted consumer demand for our GPUs.

And third, sales of certain high-end GPUs using our new Turing architecture ... were lower than we expected for the launch of a new architecture. These products deliver a revolutionary leap in performance and innovation with real-time ray tracing and AI [artificial intelligence] [capabilities], but some customers may have delayed their purchase while waiting for lower price points or further demonstration of the RTX technology in actual games.

Unless CEO Jensen Huang has some superhuman powers that we don't know about, there's nothing NVIDIA can do about macroeconomic factors. So, investors' main focus should be on progress the company had made with respect to the first and third issues Kress outlined.  

Indications are that gaming's woes are going to continue. NVIDIA is running several discounts on its RTX graphics cards and some other gaming products in May and June, and Amazon and a few other retailers are also running concurrent sales on NVIDIA GeForce GTX and RTX graphics cards, Polygon reported last week. The discounting of RTX cards, in particular, is worrisome, as cards in this line only began rolling out last fall. Discounting so early on points to demand that is likely still relatively soft. 

Data center: Are customers still cautious?

Last quarter, NVIDIA's data center platform's year-over-year growth significantly decelerated to 12%. In the first three quarters of last fiscal year, the platform's revenue grew 71% (Q1), 83% (Q2), and 58% (Q3) year over year.  

NVIDIA said 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" due to concerns about a slowing economy. This caution was widespread across verticals.

Focus on the future: Q2 guidance

The stock market is a forward-looking machine, so it's likely to reward or punish NVIDIA stock based more on the company's Q2 guidance than on Q1 results, relative to expectations.

So, you should know that Wall Street is projecting Q2 revenue of $2.55 billion and adjusted EPS of $1.12, representing declines of about 19% and 42%, respectively, year over year. The "good" news is that these anticipated declines aren't as steep as what the Street is expecting for the first quarter. That said, keep in mind that estimates are just that: estimates. 

Keep expectations in check

Investors who are used to NVIDIA's go-go-growth need to significantly lower their expectations, at least for fiscal 2020.

In Q1, the best we can hope for is that the damage isn't too bad in gaming, there's at least a little improvement in data center, and that auto and professional visualization play platform heroes like they did last quarter.