Nvidia ($NVDA) stock slumped to its lowest level in over a year after its single worst day in a decade, so what do they have in common with Tom Petty’s hit Single? FREE FALLING.
Ok, sure that was a cheap hit but on the same token so is NVIDIA’s stock price. So this begs the question.. is it now time to buy up the cheap shares of NVIDIA? After all not even 52 days ago was trading for a premium of $300 a share. Currently you can scoop up deal of a lifetime and pick up NVIDIA for a mere 45% discount as to recap again shares tumbled 18.8% on Friday, finishing the day at $164.43 per share, down from a $202.39 close on Thursday.
So what happened, why is the world leading chip maker free falling ? Here are some takeaways from Nvidia’s earnings report and call.
1. Nvidia Runs Into a Data Slump caused by Cryptocurrency Fall
Well to start with, there is a major inventory overhang for mid-tier gaming graphics cards has taken Nvidia (NVDA) to forecast its sales growth to temporarily turn negative. Furthermore on Thursday afternoon, the GPU production giant reported October quarter (fiscal third quarter) revenue of $3.18 billion (up 21% annually) and non-GAAP EPS of $1.84, missing consensus analyst estimates of $3.24 billion ( not good ) and $1.93. GAAP EPS, benefiting from a $138 million one-time tax benefit, was $1.97, above a $1.71 consensus.
What impacted investors more however was future forecasts as Nvidia also guided for January quarter revenue of $2.7 billion, plus or minus 2%. That’s well below a $3.4 billion consensus and implies a 7% annual revenue drop at the midpoint. So with this new information presented the market has reacted accordingly and have subsequently.
2. Nvidia Expects Very Low Mid-Range Gaming GPU Shipments This Quarter
The Cryptocurrency crash of 2018 has been a main contributor to Nvidia’s inventory problems. Nvidia’s demand for GPUs that were specifically meant for cryptocurrency miners ha ssignificanly decreased leading the company to come into Q3 with excess channel inventory post the crypto hangover.
Nvidia says shipments of its mid-range, Pascal-architecture, gaming GPUs have been badly hurt by an inventory overhang, as mining-related demand for the products collapsed and gamer demand didn’t grow fast enough to pick up the slack as graphics card prices remained elevated.
It’s not all over for Nvidia however and is more or less a temporary problem that can be fixed in “one to two quarters to correct” CEO Jensen Huang says. Huang also estimated that between Nvidia and “the other brand” (a reference to AMD), there’s over 12 weeks of mid-range channel inventory to burn through, and that his company has decided not to sell any more of its GeForce GTX 1060 GPU ($249 graphics card MSRP) this quarter.
Huang did, however, add that he’s “hopeful” gamer demand will improve this holiday season now that mid-range prices have stabilized, paving the way for Nvidia’s shipments to rebound once channel inventory is burned off. “I guess when pricing is volatile in the channel, it probably freezes some people waiting for prices to stabilize,” he said. “But now that it’s at the right levels, our expectation is that the market will return to normal.”
3. Lower Console Processor Demand Is Also Weighing
The system console market is at it’s peak slowdown season as games anticipate the next gen of co
nsoles to roll out and are holding off of new system purchase’s this late in a cycle as the current gen cycle is coming to an end.
CFO Colette Kress says Nvidia expects “minimal sales” of its Tegra system-on-chips (SoCs) from the game console market this quarter. The lion’s share of Nvidia’s console-related sales are believed to stem from Nintendo’s Switch console. With the Switch having launched in March 2017, it isn’t surprising to see signs that demand for the console is starting to slow.
4. Nvidia Says Demand for Turing and Notebook Gaming GPUs Is Strong
While sales of its mid-range desktop gaming GPUs have tumbled, Nvidia asserts the recently-launched high-end GPUs based on its new Turing architecture are doing well.
“The ramp is going great,” said Huang, while noting that Nvidia’s top-of-the-line RTX 2080 Ti GPU is largely sold out at retailers. He also pointed out amid concerns that a current dearth of games that support Turing’s real-time ray tracing abilities could impact near-term sales, that Battlefield V was recently updated to support ray-tracing, and that many other games will do so soon.
Separately, Huang and Kress both indicated sales of Pascal notebook gaming GPUs, which aren’t affected by the crypto overhang and have benefited from the adoption of Max-Q platform for creating thin-and-light gaming notebooks, remain strong. Notebook gaming GPU sales to China are said to have risen 50%.
5. Datacenter Sales Missed Estimates, But Still Grew Rapidly
Nvidia’s Datacenter segment revenue totaled $792 million, falling short of an $821 million consensus. However, sales still rose 58% annually — Nvidia reported strong demand for its flagship Tesla V100 server GPU — it’s used to train deep learning algorithms, as well as for other demanding high-performance computing (HPC) workloads and its V100-powered DGX servers.
6. Nvidia Plans to Start Buying Back More Stock
Back in September, Kress suggested that Nvidia could step up its capital returns, which at the time were forecast to total a relatively modest $1.25 billion in fiscal 2019 (ends in Jan. 2019). With Nvidia’s shares now well below their early-October peak, it looks like the company is now eager to do just that.
Nvidia disclosed it has added $7 billion to its stock buyback authorization, raising its total available funds to $7.94 billion. The company also said to it plans to “return an additional $3 billion to shareholders by the end of fiscal 2020,” and could begin doing so this quarter.
Separately, Nvidia hiked its quarterly dividend by a penny to $0.16 per share. That still spells a modest 0.4% forward yield.
Is it time to buy NVIDIA on the dip?
We believe the next two quarters for NVIDIA are artificially depressed, given the significant clearance of Pascal inventory, but the steepness of the snap-back is dependent on sell-through of the new Turing chips. I think we will remain positive on NVIDIA’s growth and see a pullback in shares as a solid entry point for investors if they can bare a bit of headwind coming into 2019.
i think price still has space to fall if $160 breaks, but the $120-$100 area is where I would anticipate prices to reach in the weeks ahead.
A $245 price target for December 2019 sound realistic however & in the longer term, the stock could run higher based on its positioning in terms of secular shifts in computing.
NVDA is uniquely positioned to benefit from this tectonic shift due to its leading position as a supplier of a parallel processing platform, however before that It will still take multiple quarters for the inventory issues cited in the call to sort out. Of course, for long-term investors looking at a secular shift, these down quarters could provide an attractive price point to enter and build long term positions on.
Over to you… is NVIDIA a buy? If so at what price.. leave a comment below to discuss.