Nvidia Corp. (NVDA) is bouncing on second-quarter earnings that were better than feared as gaming and automotive performance cushioned some data center disappointment.
Shares of the Santa Clara-based semiconductor company were up around 6% before Friday's opening bell, battling back after a precipitous plunge from its April highs alongside many of its contemporaries. The initial action led by both Nvidia and Applied Materials (AMAT) is implying a strong finish to the week for semiconductor indices after an inauspicious start to August.
The move to the upside for Nvidia comes after the company reported that adjusted earnings for the three months ended July 28 came in at $1.24 per share, down 36% from the like period last year but firmly ahead of the Street consensus forecast of $1.15 per share. Revenue edged out estimates at $2.58 billion despite another double-digit drop year over year for Nvidia, which is a holding of Jim Cramer's Action Alerts PLUS charitable trust.
Looking ahead, Nvidia said it sees current-quarter revenue of $2.9 billion, plus or minus 2%. While the number is below the FactSet consensus expectation and represents a year-over-year decline, it has done little to curb the stock's jump on Friday morning.
"All in, despite some segments (data center and pro visualization) coming up short vs. expectations we believe this to be a solid report from Nvidia as all divisions are once again headed in the right direction," Jim Cramer's Action Alerts PLUS team said, echoing the market's contentment with the results.
The team noted that while there were some gives and takes in the report, the long-term dynamics for the company are encouraging, which allows the team to reiterate its "Buy" rating at still-depressed levels for the stock.
"When it comes to Nvidia as we do not want to miss the forest for the trees," the team concluded.
Gaming Gets Going
To take a look at some of the sturdier trees in Nvidia's forest, gaming appears to be one of the main near-term drivers.
Revenue from the segment came in at $1.31 billion for the quarter, and while that figure was down 27% year over year, it marks a 24% sequential gain and suggests a return to growth on the back of new chip releases and a pick-up in ray-tracing capabilities in a console refresh.
"Gaming is doing great," CEO Jensen Huang told analysts on Thursday evening. "It's great to see Nvidia RTX reinvigorating the industry. GeForce has several growth drivers, ray trace games continue to gain momentum, a large number of gaming laptops are rolling out, and our new Studio platform is reaching the large underserved community of creators."
"Ray tracing is taking the gaming industry by storm and have quickly come to define the modern era of computer graphics," she said. " RTX are the only graphic cards in the market with hardware support for ray tracing. They deliver a 2x to 3x performance speed-up over GPUs without a dedicated ray tracing core.'
It is worth noting that Nvidia is also pushing past the overhang that the crypto boom built into inventory levels for gaming chips. As inventory clears and new chips carry into PCs, consoles and notebooks, the segment should sustain growth.
Another positive aspect for the company, albeit from a smaller base, was a strong beat on automotive as the prospects of autonomous vehicles remain a potential catalyst.
Revenue for the segment came in at $209 million, a 30% year-over-year gain that easily cruised past analyst estimates pegged at $177 million.
"This reflects growing adoption of next-generation AI cockpit solutions and autonomous vehicle development projects, including one particularly sizable development services transaction that was recognized in the quarter," CFO Kress said. "In addition, in June, we announced a new partnership with the Volvo Group (VLVLY) to develop AI autonomous trucks utilizing Nvidia's end-to-end AI platform for training, simulation and in-vehicle computing."
"Autonomous features can bring enormous value to the trucking industry, in particular, as the demand of online shopping put ever-greater stress on the world's transport systems," Kress said. "Expectations for overnight or same-day deliveries create challenges that can only be met by autonomous trucks, which can operate 24 hours a day."
With that confluence of factors, management sees autos as a $30 billion addressable market for chipmakers by 2025 as the industry matures. If it can capitalize, the auto segment could become one of Nvidia's most pivotal business segments.
However, the report did have one or two disappointing segments, not least of which was the datacenter.
Revenue from the segment in the quarter was $655 million, down 14% year over year and coming up short of Wall Street estimates.
"In hyperscale portion, we continued to be impacted by relatively weak overall spending at a handful of [cloud service providers]," Kress said. "While sales for internal hyperscales used were muted, the engineering focus on AI is growing."
The massive size of cloud providers such as Microsoft (MSFT) , Amazon (AMZN) and Alphabet (GOOGL) means they can move demand significantly. At present, that outsize impact is coming down on chipmakers that have positioned to pounce on datacenter demand.
Still, Huang remained confident in the long-term projections for a turnaround in these dynamics.
"With the exception of a couple of hyperscalers we're seeing broad-based growth in data centers," Huang said. "The place where we're seeing a lot of excitement and we talked about that in the past and we're seeing growth there has to do with the vertical industry enterprises that are starting to adopt AI to create new products, whether it's a delivery robot, or some kind of a chat bot, or the ability to detect fraud in financial services.
"There's some over 4,000 AI start-ups around the world and the way that we engage them is they use our platform to start developing AI in the cloud," Huang added. "We're the only AI platform that's available on-prem and in every single cloud...so we're seeing broad-based excitement around AI as they use it for their products and new services, and these 4,000-4,500 start-ups around the world is really going to drive consumption."
More Information Needed on Mellanox
As the datacenter has piqued Huang's interest and encouraged his vision for the company, his attempt to acquire Israeli computer networking company Mellanox (MLNX) could be the next key step.
Unfortunately, it is not exactly the easiest time to receive approval for such a large-scale deal.
"We have received regulatory approval in the U.S. and are engaged with regulators in Europe and China," Kress said. "The approval process is progressing as expected and we continue to work toward closing the deal by the end of this calendar year."
As trade tensions heat up, the expectation of Chinese approval of the deal in a matter of months may be overly optimistic.
Instead, the deal's progress will likely remain a lingering issue that could curb share growth should Chinese regulators reject the proposal.
For six key takeaways from the report, click here.