Nvidia Appears Chipper, but I'm Cautious

 | Aug 10, 2017 | 10:00 AM EDT
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Nvidia Corp. (NVDA) reports second-quarter results after the close on Thursday and expectations are sky-high, especially after the first-quarter report launched the stock into the stratosphere. In just the last quarter shares of Nvidia have tacked on 42%. Year to date, NVDA is up 61%.

Analysts are looking for earnings of $0.82 per share on $1.96 billion in revenue.

Nvidia really got the party started after it reported first-quarter results on May 9, when it posted earnings of $0.85 per share, four cents better than expected. Revenue likewise jumped a better-than-expected 48.7% to $1.94 billion.

Management guided the second quarter higher and then, the next day, held a wildly bullish analyst meeting. At the investor day, the company laid out a compelling case that Nvidia is not just a video game chipmaker any longer.

Indeed, management noted that its data center business grew 145% in fiscal 2017, when Nvidia ended the year with $830 million in data center revenue. The data center business then shot up 186% in the first quarter, which ended April 30. Analysts are looking for second-quarter data center revenue of $424 million, which would be up 180% year over year. Tech investors might be disappointed if third-quarter data center guidance is less than $450 million.

Supercomputing and large-enterprise customers are gobbling up chips for use in their high-end computing applications. Even cloud computing providers are getting into the act as computing environments become ever more intensive. Management thinks the data center represents a $30 billion opportunity.

Gaming continues to fuel Nvidia's growth. Wall Street is projecting gaming revenue to be up 38% year over year to just a little over $1 billion. Heading into the holidays, gaming should continue to stay hot and most likely will produce about $1.2 billion in revenue in the third quarter.

Investors have been fascinated with the potential for self-driving vehicles. The autonomous vehicles segment already is producing revenue for Nvidia, with self-driving revenue in 2017 of $487 million, up 52% from the year before.

But this quarter, growth in autonomous vehicle revenue is expected to slow sequentially. Specifically, second-quarter revenue for the segment is expected to total about $144 million, which would be up just 3% sequentially (or 21.8% year over year). Last year in the second quarter, the segment grew 5% sequentially. Analysts are expecting much the same for the third quarter, or about $148 million in self-driving revenue.

Last quarter, non-GAAP gross margins were strong at 58.6%. The consensus is looking for flat gross margins this quarter. In terms of operating margins, analysts think slightly higher expenses will shave about 140 basis points off operating margins, but those should recover as the company moves into the third quarter, when higher-margin gaming revenue begins to grow faster than the company average.

Right now, the Wall Street consensus is looking for third-quarter guidance of $2.1 billion in revenue (up 8% sequentially) and $0.91 per share, with a gross margin of 58.6% and an operating margin of just over 32%.

Year to date, Nvidia is the fifth-best-performing stock in the S&P 500. To me, it seems the good news is priced into the stock, so I would take an opportunistic approach to the shares. I would look to buy the stock on weakness or any slight disappointment.

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