Nvidia Corp. (NVDA) CEO Jensen Huang needs to deliver on Thursday evening.
The semiconductor stock was higher in early trading ahead of an afternoon earnings release, thus continuing a trend that has marked a 20% run from its year-to-date low in early January. However, Nvidia shares still are down by nearly half from their high in the fall of 2018 after a spate of bad news that included a bearish pre-announcement of results in late January.
The consensus estimate for the January-ended quarter is for earnings of $0.62 per share and $2.24 billion in revenue, which is a significantly lower bar than prior to Nvidia's pre-release.
"Q4 was an extraordinary, unusually turbulent, and disappointing quarter," Huang said in the pre-announcement on Jan. 28.
As a result of this turbulence, Huang lowered his revenue guidance for Thursday's report from $2.70 billion to $2.2 billion, lowered gross margin expectations from 62.3% to 55%, and raised some expense measures.
"Gross margin [is expected] to be impacted by approximately $120 million in charges for excess DRAM and other components associated with the updated revenue guidance and current market conditions," Nvidia said in the pre-announcement.
After the release of the bad news ahead of the report, every analyst polled by FactSet pulled in their price targets and expected some persistent pain as the quarter irons out.Building Trust
According to FactSet, Nvidia largely has been a trustworthy stock on earnings, providing beats on top and bottom lines on all but one release over the past two-and-a-half years.
The problem is that the most recent report in November was the outlier and it largely has been bad news since then.
Many investors felt misled by Nvidia in November, as Huang previously told them not to worry about cryptocurrency hangovers and promoted the idea that the rapid release of next-generation Turing chips would continue to outclass competitors such as Advanced Micro Devices (AMD) .
"Last quarter [Jensen Huang] said 'we are masters at managing our channel,' which turned out not be the case," Bernstein analyst Stacy Rasgon told Real Money at the time of the November release. "Management credibility definitely took a hit after [the November] quarter."
In the pre-announcement Huang again noted that he believes cryptocurrency impacts are under control.
It will be imperative that Huang gets it right this quarter after already tempering his guidance. After November's nearly 20% drop in the stock after the crypto crash, a miss on the fourth quarter's already-lowered bar could be catastrophic.
However, analysts are wondering if management might again be hiding the true impact of cryptocurrency.
"We believe the severity of the [earnings revision] cannot be chalked up to mere inventory correction, although so far, that is how the NVDA management portrayed much of the miss," Lynx Equity Strategies analyst KC Rajkumar wrote. "Uncomfortable questions need to be asked of the Management as to just how much of the tremendous growth in Gaming in recent years has been due to crypto-mining, a demand driver which is unlikely to ever return."Gaming Isn't Gaining
Gaming overall is held back by both demand drivers and macro concerns related to China.
"Deteriorating macroeconomic conditions, particularly in China, impacted consumer demand for NVIDIA gaming GPUs," Huang said in January. "In addition, sales of certain high-end GPUs using NVIDIA's new Turing architecture were lower than expected. These products deliver a revolutionary leap in performance and innovation with real-time ray tracing and AI, but some customers may have delayed their purchase while waiting for lower price points and further demonstrations of RTX technology in actual games."
Ray-tracing has not caught on as much as expected for the RTX chips as less-demanding free-to-play games have garnered a ton of consumer attention, diminishing the impact of cutting-edge, PC-gaming chips such as those that Nvidia has focused on.
If cryptocurrency does indeed remain a hangover for several quarters, such headwinds will do little to assuage investor concern about the segment.
"Following the company's somewhat chilly guidance cut we believe the shares are likely to remain hamstrung," Bernstein's Ragson wrote ahead of the earnings release on Thursday. ""The latest cut appears much more fundamentally demand-driven, with the question of the 'true' run-rate of the gaming business remaining up in the air for now."
Considering that gaming represents more than 50% of Nvidia's revenue generation, the uncertainty is not helpful for those looking to predict the results on Thursday evening.Looking Long Term
Still, based on the secular story the company calls on to justify its 30x forward price-to- earnings (P/E) ratio, many analysts are advising investors to keep their eyes further down the road.
"The stock is down almost 50% off its October highs as the Jan Q represents the most significant quarter-over-quarter and year-over-year decline since the financial crisis," Credit Suisse analyst John Pitzer noted. "We don't expect a rapid rebound, but with estimates de-risked after April quarter guide, we expect the long-term story for the company to remain intact."
Based on that view into 2020 and 2021, Pitzer set a longer-term "Outperform" rating on the stock and assigned a $225 price target to Nvidia.Driving and Datacenters
Key to the story that could drive Nvidia forward from this de-risked position are accelerations in both autonomous driving and datacenter demand.
"With the introduction of new solutions like Tegra for the auto market, we expect NVDA's PC dependence to diminish somewhat," Oppenheimer analyst Rick Schafer wrote. "We see several sustained structural tailwinds driving sustained outsized top-line growth: gaming, datacenter/AI accelerators, and autonomous vehicles."
Schafer added that he believes many of the hits to the stock are only temporary and obscure the view of a company looking to capitalize on longer-term trends in technology.
"NVDA offers secular growth and gross margin expansion, rare among large-cap semiconductor names," Schafer said. "We maintain our Outperform rating and $190 price target."
Still, the questions around datacenters are still swirling after Nvidia told shareholders that a number of deals in the company's original forecast did not close in the quarter it's about to report "as customers shifted to a more cautious approach."
In addition, these segments still pale in comparison to the revenue driven by the core gaming segment.
"We remain unsure of the multi-year growth rate for NVDA's Gaming and Datacenter segments, and await a time when we begin to receive more visibility on growth going forward," Deutsche Bank analyst Ross Seymore said.
Seymore expects datacenter to come in below the street's estimates as competition, namely from Amazon.com Inc. (AMZN) , ramps up and curbs the outlook.
Seymore said the slowdown brings into question the overall angle of growth in cloud and data-driven opportunities the company touts, at least until there is more clarity on the potential for these smaller segments.Bottom Line
Nvidia was once the apple of many an investor's eye, but since has fallen from favor. Some former fans have even renamed pets after some doggish earnings results.
It ultimately will come down to a reclamation of market trust from CEO Huang as he attempts to follow in Apple Inc.'s (AAPL) footsteps in shaking out all the bad news from his stock.
Many will be waiting for a firm signal on whether he can accomplish this tall task before feeling confident enough to put in a position at this point.
For trading strategies to consider surrounding the release, click here.