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Expected a Wrong First Quarter Earnings Call at Nvidia – NVIDIA Corporation (NASDAQ: NVDA)



Nvidia (NVDA) Q1 income is on the crane for Thursday after close quarters. Entering Q1, the company's income distribution has been as follows:

Management steered Q1 revenues to be around $ 2.2 with a margin of around 59%.

As such, we have been negative on Nvidia prospects because of Crypto Loss and Advanced Micro Devices (AMD) and competitors' market share gains. With these headwinds, Nvidia had a difficult task meeting its already low Q1 guidance. On top of this, Nvidia has seen further headwinds since the quarter started:

  • Datacenter, with all indications, is weaker than expected as results from Intel (INTC).
  • Although it seems that Nvidia has cleared the channel for high-end GPUs, the new RTX products needed unusual price reductions in the middle of the quarter.
  • There are indications that the channel inventory at the end of the GPU market remains.

Therefore, we see that Nvidia lacks the already challenging first paragraph. Our expectation of revenue sharing in the first quarter is as follows:

Games: $ 850M; Pro: $ 290M; Data center: $ 600M; Car: $ 150M; OEM and IP: $ 110M

It provides Q1 revenue estimates at $ 2.0B – a $ 200M lacks guidance and consensus. We also expect Nvidia to sacrifice around 300 basis points in margin to get sales to the $ 2B mark. As a result, Nvidia will probably post a much larger miss on the EPS front.

It is possible that Nvidia has made the quarter by sending ahead as it has done before. In that case, the balance will show signs of strain. We will look at it.

Although the results in the first quarter will be interesting to see, the real risk for Nvidia is equity in the guidance. It is not only Q1 that looks anemic, the company faces several major headwinds for the rest of the FY2020:

  • US trade war with China is likely to have a negative impact on FY2020
  • Low-lying graphics inventory is likely to last through Q2 into 3 quarter.
  • AMD continues to perform on its road map and has now confirmed that Navi, a competitor in the general GPU market, will launch in the third quarter. This will make H2 FY2020 gradually more challenging for Nvidia.
  • And finally, in Q3, AMD is set to overcome Intel at the high end of the desktop and server CPU markets and AMD's CPUs will pull along the significant amount of GPU business that Nvidia would otherwise have gotten.

If our assessment is accurate, it is unsustainable for Nvidia management to keep its current FY2020 guidance. As such, it would be easy for management to blame the commercial war and reduce guidance now without acknowledging competitive challenges. Therefore, we now expect the Nvidia management to release the income guidance for FY2020 by about 10%. Analysts and investors will be hard pressed to get EPS much north for $ 4 with the guidance and downgrades likely.

Such a move can push the shares well below 52 weeks low around $ 127.

We look forward to investors becoming increasingly involved in the reality that:

  • Much of the hyper growth that drives Nvidia valuation was not games, but crypto and that segment are now largely irrelevant.
  • Nvidia has significantly less violence in both games and data center markets and is increasingly losing stock to AMD.
  • Autonomous driving, the supposed next growth driver for Nvidia, remains a futuristic market with no prospect of significant near-term earnings.
  • Nvidia overpaid Mellanox and Mellanox will only help marginally with Nvidia's growth challenges.

We continue to see that the company's fair value is close to $ 50.

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Disclosure: I am / we are short NVDA. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.

Additional Information: Long AMD


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