Cathie Wood's asset management firm, ARK Invest, revealed it sold nearly 300,000 shares of leading chip designer Nvidia (NVDA 6.18%) on Tuesday, a day ahead of the earnings update. At first blush, it looks like Wood and her team had the right idea. As previewed a few weeks ago, Nvidia reported a 19% quarter-over-quarter decline in second-quarter revenue to $6.7 billion -- well below previous guidance of $8.1 billion. Even worse, Nvidia said it expects third-quarter revenue to be just $5.9 billion, yet another sequential decline and down from revenue of $7.1 billion in Q3 a year ago.
Nvidia is getting hit with a cyclical decline in sales, and there's no telling how long it will last. Should you follow Wood and sell Nvidia stock yourself?
A bet (albeit a smaller bet) on Nvidia
First, let's acknowledge that ARK Invest's sale of Nvidia stock (worth some $50 million at yesterday's prices) is relative. The two funds that sold -- the ARK Innovation ETF and the ARK Next Generation Internet ETF -- still own sizable amounts of Nvidia. Just over 1% of both funds was allocated to Nvidia stock a day before Nvidia's update for its fiscal 2023 second quarter (a three-month period that ended July 31).
Even so, Wood's ARK Invest is likely slimming down its Nvidia stake as a cyclical downturn in consumer electronics takes hold. The third-quarter outlook -- revenue of just $5.9 billion -- implies a year-over-year decline of 17% at the midpoint of guidance. Gaming hardware sales are to blame, impacted by turmoil in the cryptocurrency industry. Nvidia's graphics processing units (GPUs) are often used to mine some cryptos like Bitcoin and Ethereum, but Ethereum's Merge is eliminating the need for high-powered chips.
The good news is that margins won't be hit as hard as some investors may have expected. After adjusted gross margin took a big dip on product sold (which Nvidia said was due to clearing existing inventory at retail partners), it looks like it will rebound in Q3. Clearing old inventory was key ahead of Nvidia announcing a refreshed lineup of gaming GPUs in September.
|
Period |
Nvidia Adjusted Gross Profit Margin |
|---|---|
|
Fiscal 2022 |
66.8% |
|
Q1 2023 |
67.1% |
|
Q2 2023 |
45.9% |
|
Q3 2023 (expected) |
64.5% to 65.5% |
Data source: Nvidia.
Nvidia apparently doesn't agree with ARK Invest's sale
If the past is any indication, this cyclical downturn for Nvidia's revenue isn't over. ARK Invest might simply be refreshing cash so it can buy stocks it thinks might perform better than Nvidia in the next six months or so as the company finds a bottom in this revenue downturn cycle.
But here's the problem: The market anticipated this cyclical downturn and clobbered Nvidia stock already this year. Sooner or later, if Nvidia's data center and automotive segments keep running higher and gaming eventually rebounds, Nvidia shares could rocket higher. Again, if the past provides a lesson for what's to come, the market will pick up on this before Nvidia reports an uptick in overall revenue growth.
Data by YCharts.
On the earnings call, CEO Jensen Huang talked about how uses for Nvidia GPUs have grown substantially -- and that growth isn't slowing down. Besides gaming, Nvidia hardware powers artificial intelligence (AI) in data centers, self-driving car technology, robotics, and new cloud computing services. Apparently, Huang and company think this dip will be temporary, just like past downturns.
Don't get me wrong; things could get worse before they get better for Nvidia. Perhaps Wood and her ARK Invest plan on buying more Nvidia later as the situation improves. But if you still believe in this long-term chip and AI behemoth's story, now isn't the time to sell. The end of 2021 or the beginning of 2022 would have been the time to trim a position (if that's your style). For long-term buy-and-hold investors, there's still a lot to like about Nvidia stock right now.
