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Can NVIDIA Break Out of the Rut When It Reports Its Fiscal Q2 Earnings?

By Danny Vena – Aug 13, 2019 at 2:00PM

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Will the chipmaker return to growth or is there more pain in store?

If you're an investor in NVIDIA (NVDA 3.07%) like I am, you're probably suffering from whiplash. After gaining more than 1,200% over three years and topping all-time highs in September of last year, the stock plummeted, and in four months had lost more than half its value.

What caused the precipitous drop? Demand for chips used to mine cryptocurrency evaporated, leaving many sales channels overstuffed with supply. Additionally, a big growth driver over the past several years -- the chips used in data centers and artificial intelligence applications -- seemed to dry up overnight. This combination of factors sent NVIDIA shareholders running for the exits.

Investors will get their next look at NVIDIA's prospects when the company reports the results for its fiscal 2020 second quarter (which ended July 28, 2019) after the market close on Thursday, Aug. 15. Let's look at the most recent quarter to see if it provides any insight into what investors can expect.

NVIDIA GeForce RTX 2080 Ti Gaming processor.

NVIDIA GeForce RTX 2080 Ti gaming processor. Image source: NVIDIA. 

A massive crypto hangover

For the first quarter, NVIDIA reported revenue of $2.22 billion, down 31% year over year, and it was difficult to find any good news elsewhere in the results. Gaming revenue -- the company's bread and butter -- declined 38% year over year to $1.06 billion. NVIDIA had been working to clear out channel inventory caused by the cryptocurrency collapse. If there was any good news in the segment, it was a sequential increase of 11% for the chips used by gamers.

Data center revenue of $634 million declined by 10% year over year, due to what CEO Jensen Huang described as a "near-term pause in demand from hyper-scale customers."

Two of NVIDIA's smaller business units -- professional visualization and auto -- grew revenue to $266 million and $166 million, respectively, eking out gains of 6% and 14%. Unfortunately, the OEM segment -- which houses cryptocurrency chips -- saw sales decline by 74%, though at $99 million, this is the smallest of the company's operating segments.

It's important to mention that due to the dearth of chips designed specifically for cryptocurrency mining, gaming chips were being substituted for the task. Once the demand dried up, it hurt both the gaming and the OEM segments. When the chips in the supply channel have cleared out, investors are hoping the demand will return to historical levels.

The fallout from declining revenue continued down the financial statement, with adjusted net income of $543 million, resulting in adjusted earnings per share of $0.88, plummeting about 57%.

What the quarter could hold

For the upcoming third quarter, NVIDIA is guiding for revenue of about $2.55 billion, plus or minus 2%, which would represent a decline of about 18% year over year. The company doesn't provide per-share guidance, but using the midpoints of the guidance ranges given for gross margins, operating expenses, and tax rates, net income under generally accepted accounting principles (GAAP) should come in at about $448 million. Assuming about 609 million shares (the share count as of May 10), earnings per share would be about $1.07. NVIDIA decline to provide full-year guidance.

To put that into the context of Wall Street's expectations, analysts' consensus estimates are pegged at $2.55 billion and earnings per share of $1.14 for the third quarter.

With so much uncertainty, investors shouldn't get their hopes up just yet.

Danny Vena owns shares of NVIDIA. The Motley Fool owns shares of and recommends NVIDIA. The Motley Fool has a disclosure policy.

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