After pouring through Nvidia's (NVDA) earnings and sitting through the call on Thursday, it's no big surprise the stock is oscillating around unchanged on Friday. Bulls are winning the tug-of-war by a small margin and I expect that to hold. In fact, if NVDA can trade above $163.50, I think buyers can pick up some momentum.
The initial reaction last night to a stronger than expected bottom line saw shares immediately add $10. That held roughly until NVDA got past the early portion of the prepared remarks section of the conference call. As the CFO delivered Q2 guidance, basically in line with Wall Street expectations, the company announced it would no longer be giving guidance beyond the current quarter.
Whack! $6 came off the after-hours bump in the blink of an eye. This was the first yellow flag for me.
Nvidia went on to add that the second half of the year should be stronger, which is built into current Wall Street expectations and the company sees it playing out in line with their expectations. Unfortunately, none of us knows what those expectations are. The call did go from upbeat to more reserved when the company spoke about discontinuing year-long guidance.
The second yellow flag came in the form of Nvidia's discussion about China and the question if they believed China could interfere with the Mellanox deal (NVDA buying (MLNX) ). The company did a terrific job of avoiding the question. Rather than answering directly, Nvidia spoke about the merits of the deal first. Then, they added that they do a lot and mean a lot to China.
So, investors are to believe that Nvidia's business in China is worth more than China, THE COUNTRY, as a whole positioning itself in the best way possible to negotiate the current Trade War. This commentary bothered me more than the company withdrawing guidance beyond the quarter. Note that Mellanox shares are trading down again today. The stock is 9.2% below the cash buyout price that is set to close in less than seven months. This is a HUGE discount for a cash deal.
And it is a lot of cash for Nvidia. Fortunately, the company has solid free cash flow, but the MLNX deal will eat up the current coffers.
With those things in mind, it is important to note that there were green shoots on the call as well. Gaming performed much better than expected. Gaming is the heart and soul of Nvidia, so to see it outperform is a positive. Additionally, the company worked through much of its inventory issues and expects those to be behind it by the end of the current quarter or early next; however, what remains is minor.
The move deeper into esports and subscription gaming that allows players to play high level games on base systems by taking advantage of the cloud is 100% a step in the best direction of gaming. Esports is the future of gaming and subscription modeling should maximize visibility and margins for Nvidia.
Circling back to Mellanox, Nvidia made it clear the company is all-in on artificial intelligence (A.I.) and data sciences once the Mellanox deal closes. From a societal standpoint, it is needed and the future, but the question remains how profitable the venture will be. We do see more and more companies using machine learning and A.I. to help with e-commerce and customer service, but Nvidia is seeking to take it one step further with data sciences, the evolution of A.I. The early financials on this initiative are promising.
Lastly, automotive continues to plug along with slower growth than I anticipated. It will come, but I believe it will be 3-5 years not 1-2 before this segment of the company really boosts the bottom line. A catalyst for sure, but it won't get NVDA out of its current slump in calendar year 2019.
Overall, there is nothing about the report that makes me want to scream "buy the stock". Then again, there is nothing in there that begs for shares to be shorted. Bulls can pluck pieces to make their buy argument while bears can do the same. That's why we're seeing an indecisive move today. It's the same reason I'll be on the sidelines in the near future until I have either more clarity in terms of business or the technical picture offers a trade.