NVIDIA's Earnings Show It's Acing the Comeback Game, but Stock Gain Is Scant on Light Outlook

NVIDIA (NVDA -2.48%) reported fiscal third-quarter 2020 results after the market closed on Thursday, Nov. 14. The graphics processing unit (GPU) specialist's revenue slipped 5% year over year to $3.01 billion and earnings per share adjusted for one-time items edged down 3% to $1.78. 

Like the last three quarters, key numbers fell on a year-over-year basis, as expected. However, the good news is that, like last quarter, both the top and bottom lines were up sequentially and adjusted EPS easily beat the Wall Street consensus estimate, which was $1.57. Revenue also came in ahead of projections, as analysts were looking for $2.91 billion.

Shares edged up 0.9% in after-hours trading on Thursday. Why such a ho-hum initial response to a solid earnings beat? NVIDIA's fourth-quarter revenue and earnings guidance was lighter than expected.

In 2019, shares have returned 57.6% through Thursday's regular trading session, versus the S&P 500's 25.7% return. However, the former high-flying tech stock is still underperforming the market over the last year -- a 6.8% vs. a 17% return -- due to getting clobbered in the fourth quarter of last year. 

Image source: Getty Images. 

NVIDIA's key numbers

Data source: NVIDIA. GAAP = generally accepted accounting principles.

NVIDIA had guided for revenue of $2.9 billion, which is why the Street was looking for $2.91 billion. 

Results continue to rebound on a sequential basis, with revenue and adjusted EPS up 17% and 44%, respectively, from the second quarter. 

GAAP gross margin came in at 63.6%, up from 60.4% in the year-ago quarter and also higher than last quarter's 59.8%. Adjusted gross margin was 64.1%, up from 61% in the year-ago period and also better than the second quarter's 60.1%.

Platform performance 

Data source: NVIDIA. *OEM and IP = original equipment manufacturer and intellectual property; not a target market platform. YOY = year over year. QOQ = quarter over quarter.

Gaming and data center continue to rebound 

NVIDIA's results in its two largest businesses continue to recover from the hit they took in the fourth quarter of 2018. Gaming was particularly hit hard, with revenue plunging 45% year over year and plummeting 46% sequentially in that quarter. The impetus was the cryptocurrency bust, which resulted in the company being stuck with a glut of the type of graphics cards that some folks had been using to "mine" digital currencies. Management has attributed the data center sales decline that began in that quarter to customers pausing due to concerns about a slowing global economy.

In her CFO commentary, Colette Kress had this to say about the Q3 growth drivers for these businesses:

The year-on-year decrease [in gaming] reflects lower sales of GeForce desktop GPUs from the prior year, which included the launch of Turing-based GeForce GPUs, partially offset by growth in GeForce notebook GPUs and SoC [system on a chip] modules for gaming platforms. The sequential increase reflects growth primarily from GeForce desktop and notebook GPUs.

The year-on-year decline [in data center] reflects lower enterprise revenue due to a different mix of products including lower DGX sales, partially offset by an increase in hyperscale demand. The sequential increase was driven by hyperscale demand.

Pro viz continues to be old reliable, while auto's results are nothing to sweat

Professional visualization was the only platform that grew on both a sequential and year-over-year basis. Growth was driven by continued strength in the company's mobile workstation products, with last year's launch of RTX ray tracing providing a tailwind.

While auto's revenue fell slightly from the year-ago period and more substantially from last quarter, investors don't need to be concerned. This platform's results will be "lumpy" because it's a relatively small business. Kress said in her commentary that the "year-on-year decrease reflects lower revenue from legacy infotainment modules and autonomous vehicle solutions," while the "sequential decrease reflects a large non-recurring development services agreement closed in the prior quarter."

Mellanox acquisition close date likely pushed back  

NVIDIA said in its earnings release that it's still in discussions with regulators in Europe and China regarding its pending acquisition of Mellanox, a supplier of interconnect solutions for servers and storage. The company originally expected this all-cash $6.9 billion deal to close by the end of this calendar year, but said in the earnings release that the date will now "likely" be in early 2020.

Assume guidance is quite conservative

NVIDIA turned in results that should satisfy most investors. Its gaming business has now posted three consecutive quarters of solid sequential revenue increases and its data center has posted two quarters in a row of sequential revenue growth. So, the company is on track to soon resume its year-over-year growth mode. And, in fact, the Street is projecting that will occur next quarter.

For the fourth quarter, NVIDIA guided for revenue of $2.95 billion. This represents growth of 33.5% year over year. Wall Street had been modeling for Q4 revenue of $3.06 billion, so the company's outlook came in a little light. NVIDIA also guided (albeit indirectly, by providing a bunch of inputs) for adjusted EPS of $1.65, assuming I calculated correctly. This represents growth of 106% year over year. Analysts had been anticipating adjusted EPS of $1.70, so the company's profit guidance also fell a bit short of expectations. 

You can be sure that NVIDIA's outlook is quite a bit lighter than what management really expects. Some of you will recall that it had been too optimistic going into the fourth-quarter 2018 report and was forced to cut its guidance for that quarter in advance of the release, resulting in the stock being pummeled. It surely doesn't want a repeat of that scenario.