Nvidia (NVDA, Financial), the maker of graphics chips for gamers, professionals and data centers, reported the results of its second fiscal quarter yesterday, which outperformed the Street.
The California-based chip-maker generated revenue of $3.12 billion during its second fiscal quarter of 2019, up 39.9% compared to the same quarter last year. Analysts were looking for revenue of $3.10 billion. Nvidia managed to post non-GAAP earnings per share of $1.94, beating the analyst consensus of $1.85. Earnings per share skyrocketed 95% year-over-year during the quarter.
For the third fiscal quarter, the GeForce designer is aiming to reach midpoint revenue of $3.25 billion, below the analyst consensus of $3.34 billion. The management also expects earnings per share to fall short of the consensus of $1.99, reaching earnings per share of $1.93 during the third fiscal quarter of 2019. The stock is trending downwards on weak guidance, declining 2% since the earnings release after the closing bell on Thursday.
What drove top line performance?
“Growth across every platform – AI, Gaming, Professional Visualization, self-driving cars – drove another great quarter,” said Jensen Huang, the CEO of Nvidia.
Growth was primarily supported by gaming revenue, which increased 83% and data center revenue, which increased 53%. Gaming contributed the most toward the total revenue, making up 60% of the revenue. Data center made up around 25% of the total revenue.
Demand for Nvidia’s gaming gear including Pascal-based GPUs for desktop and notebooks went up during the quarter, nudging gaming revenue higher. Max-Q technology, enabling high performance GPUs in thin form-factors, boosted demand for Nvidia’s GPU products for high-end portable PCs during the quarter. Nvidia expects to see 26 notebook models featuring the Max-Q technology during the next quarter.
Data center revenue grew amid strong sales of Nvidia’s Volta products including Tesla V100 and DGX systems. It’s worth mentioning that Volta has been adopted by all major cloud providers including hyper scale datacenters around the globe. Growth in the automotive segment was not equally impressive as revenue grew 13% year-over-year to reach $161 million during the quarter.
Why isn’t the market impressed?
While Nvidia witnessed impressive growth across verticals, the stock is in red territory today. Rich valuation, high growth expectations and worse-than-expected guidance might have contributed to the negative stock price action today.
1. Difficult comparisons
Nvidia consistently posted more than 40% year-over-year growth in recent quarters, resulting in a high premium on its stock price. That’s why the stock price is sensitive to even the smallest of revisions in growth forecasts.
The company is guiding for third-quarter revenue that is, on average, $100 million below the analyst consensus. For the full fiscal year, analysts are expecting around 34.8% growth in Nvidia’s revenue, but the company might miss the mark given weaker-than-expected guidance.
2. Stretched valuation
Premium valuation might be another reason Nvidia is trending downwards today. The stock trades at a forward price-earnings ratio of 33, which is not exactly cheap. Moreover, investors are paying around $14 per dollar of sales for the shares of Nvidia.
The graphs show that Nvidia’s investors are paying quite a premium for the stock. However, Nvidia does appear reasonable on PEG – the ratio that tracks the value relative to growth.
The graph shows a PEG ratio of around 1, which makes Nvidia a reasonable growth stock. In short, as the market is banking on growth to justify Nvidia’s valuation, the stock is sensitive to revisions in growth.
The battle for AI and machine learning market
It seems Nvidia will continue to witness stellar growth going forward. Given the rise of hyper computing, AI and machine learning, GPUs will continue to be in demand. Nvidia recently unveiled its new GPU architecture dubbed Turing. The brand new architecture packs RT cores for ray tracing – a technique to render realistic lighting – and updated Tensor cores for AI applications. Nvidia claims that Turing will allow the company to tap into the $250 billion visual effects industry.
Turing is the latest blow to Advanced Micro Device (AMD, Financial)'s machine learning ambition as team-Radeon is struggling to tap into the AI market. Although AMD is launching a 7nm Vega-based Radeon Instinct – designed for machine learning applications – later this year, only time will tell how it pits against Nvidia’s Turing.
Takeaways
- Nvidia continues to register high growth, thanks to the increasing demand of its chips for data centers and gaming.
- The GPU maker should maintain more than 30% per-year revenue growth in order the justify its premium valuation
- Turing can provide Nvidia with additional addressable market in visual effects market as AMD brings competition to Nvidia with 7nm Radeon Instinct machine learning GPU.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
