Thursday night, traders waited with bated breath for Nvidia (NVDA) earnings. Tick Tick Tick. The calendar was thin. Already looked at 150 years worth of history at Baseball Reference. So it seemed. Tick Tick. Finally, the numbers dropped.
For the firm's third quarter, Nvidia posted adjusted EPS of $1.78, easily beating expectations. Sales hit the tape at $3.01 billion, -5.1% annually, but another nice beat. The little car pulled into the center ring, stopping precisely over the trap door. At least 20 analysts (that I noticed), many of them rated five stars, made public opinion. The majority of the group raised target prices. Yet, the shares traded lower mid-day on Friday.
The firm did guide lower for the fourth quarter but the analyst community did know that. So, just what gives? Let's dig in.
Buts and Guts
It quickly becomes apparent that while a number of business lines are still printing at lower levels than they were one year ago. Perhaps the comparison, given the trade war with China, and still ongoing issues with demand and supply, thanks partially to last year's crypto-currency balloon popping festival, is unfair.
Comparing sequentially (quarter over quarter) better illustrates just how far some of these businesses are indeed rebounding. That said, not operating expenses. Those only moved 3% higher over the second quarter as revenue grew 17%. What this did was lead the firm to gross margin of 64.15, up from Automotive Q2's 60.1%. (For the new kids, that's a five run homer.) The higher margin on higher revenue resulted in q/q growth of 45% in net income. Let me hear you say "Oh yeah." I mean it. Say it. Okay, do it in your head.
It also quickly becomes apparent that the firm is firing hot, but not on all cylinders. Of the just over $3 billion in revenue, $1.66 billion came from Gaming. That's +26% q/q. The Data Center grew 11% q/q to $726 million, but that was below projections. The other segments are smaller, but what you need to know is that Professional Visualization and OEM are growing sequentially, but Automotive badly disappointed. There is surely a story there but perhaps not yet. You and I both think that we would not like to give up self-driving, but there are plenty of transportation services type companies watching this technology develop very closely.
I am long some Nvidia. I got down to skinny ahead of the numbers, but I do not intend to stay skinny. It's November, and screwing up late in the year is one of my least favorite sports. It's up there with crossing disgusting swamps in areas crawling with Water Moccasins.
I believe that right now, Nvidia is fortunate to be very strong in a business that is consumer-centric, but business spending will return in size at some point. Maybe as soon as there is a Phase One trade deal. CapEx will go into the data center, and there will be an effort made to hyper-scale that data center as those businesses work on improving margin.
I did not even go into artificial intelligence, but when it comes to highly specialized, highly capable GPUs, and then AI, 5G, and the IoT (Internet of Things), I think that I have to be in this name.
Cup with handle pattern over the summer worked like a charm. That was when I placed a $208 target price on this name that was pierced a few time in November. Another reason why I came in skinny. I am encouraged by the quarter, and I believe through the reduced expectations for the fourth quarter, the firm might just be purposefully conservative here, as there are so many uncertainties.
- Target Price: $227 (up from $208, and now more in line with consensus)
- Add: $190 (up from $174)
- Panic: $188 (up from $160)