Elite level semiconductor designer Nvidia (NVDA) released the firm's fiscal third quarter financial results on Wednesday night.
For the three month period ended October 30th, Nvidia posted adjusted EPS of $0.58 (GAAP EPS: $0.27) on revenue of $5.931B. The adjusted earnings number fell well short of consensus. However, the sales print did beat lowered expectations, while contracting 16.5% year over year.
Adjusted gross margin printed at 56.1%, up from 45.9% for the second quarter, but down from 67% for the year ago comp. The firm had guided investors toward 65%, so this is a significant miss. On that note, the firm took inventory-related charges of $702M, due to reduced demand in China, that was partially offset by a warranty benefit of about $70M.
Adjusted operating expenses increased 30% to $1.793B, forcing adjusted operating income down 55% to $1.536B. That knocked adjusted net income down 51% to $1.456B. Adjusted operating and adjusted net incomes were up 16% and 13% respectively, quarter over quarter.
GAAP Cash provided by operating activities came to $392M from $1.519M a year ago, as purchases related to property and equipment increased to $530M from $221M. Hence, free cash flow dropped to $-156M from the year ago comp of $1.276B.
Data Center: drove revenue of $3.83B (+31%), nearly meeting expectations. The firm notes that growth was not an issue in the US. There was however weakness in China both due to the US government's restrictions on exporting the A100 and H100 chips to that country as well as demand from China described as "soft." The firm did mention the new A800 chip that is US regulation-compliant that is being sold to Chinese clients and did serve to offset the reduction in sales made.
During the call, in answering a question from Ambrish Srivastava of BMO Capital, Nvidia CEO Jensen Huang said, "The hardware of A800 ensures that it always meets (the) US government's clear test for export control. And it cannot be customer reprogrammed or application reprogrammed to exceed it."
Gaming: drove revenue of $1.57B (-51%), far better than expectations. These sales, according to CFO Collette Kress, reflect "lower sell-in to partners to help align channel inventory levels with current demand expectations. We believe Channel inventories are on track to approach normal levels as we exit Q4 (the current quarter)."
Automotive: drove revenue of $251M (+86%), beating Wall Street's expectations. Growth here was reflective of an increase in demand for AI automotive solutions. Kress states a belief that "Automotive has great momentum and is on its way to be our next multibillion-dollar platform."
Professional Visualization: drove revenue of $200M (-65%), far below expectations. Here again, CFO Collette Kress explains that sales reflect a "lower sell-in to partners" for inventory management purposes.
For the firm's fiscal fourth (current) quarter, the firm sees...
- Revenue of $6B (+/-2%). The 2% creates a range spanning from %5.88B to $6.12B. Wall Street was looking for $6.1B here.
- Adjusted gross margin of 66%, GAAP gross margin of 63.2% (+/-50 bps). This is slightly above Wall Street's expectations.
- Adjusted operating expenses of $1.78B, GAAP operating expenses of $2.56B.
Nvidia ended the quarter with a net cash position of $13.143B (-38% fiscal ytd), and inventories of $4.454B (+71% fiscal ytd), leaving current assets at $23.223B (-19% fiscal ytd). Current liabilities amount to $6.855B including $1.249B in short-term debt. This puts Nvidia's current ratio at $3.39 and its quick ratio at 2.74.
Even though the firm has had to use the balance sheet in order to work through this period that includes negative free cash flow, and these ratios have come in, this remains an incredibly strong balance sheet.
Total assets add up to $40.488B including $6.222B in "goodwill" and other intangibles. at 15% of total assets, that number is not a problem. Total liabilities less equity comes to $19.139B. This includes $9.701B in long-term debt. The firm has enough cash on hand to eliminate all of its long and short-term debt out of pocket and still leave a nice balance.
This is a balance sheet that can carry the firm. Most of corporate America is probably envious, but this is the extraordinarily high quality balance sheet that Nvidia created, and this environment is why they created it.
Since these earnings were released, I have found 14 sell-side analysts that have opined on NVDA and are rated at five stars by TipRanks. Of those 14 we have 10 "buy" or buy-equivalent ratings and four "hold" or hold-equivalent ratings. The average target price across the 14 is $203.93 with a high of $320 (Hans Mosesmann of Rosenblatt Securities) and a low of $150 (Ross Seymore of Deutsche Bank).
Once omitting the high and the low as outliers, the average target price of the other 12 drops to $198.75. Separating by rating type, the average target of the 10 "buys" comes to $218.00 while the average target of the four "holds" is $168.75.
Real Money readers know I came into earnings long NVDA. I did inform readers on November 8th that I would likely take some profits ahead of earnings. Viewers of Liz Claman's program at Fox Business learned a day ahead of the release that I did just that. I still believe that Nvidia is heading in the right direction. I was up big (+27%) and that was just trading.
It has not been easy for Nvidia, and while it may get easier going forward, it likely won't get back to what had become normal until Covid is gone and the Chinese government completely eases related restrictions in addition to getting along with the US and US allies better than has been the case. So, maybe not for a long time.
That said, at the high-end computing game is there anyone better? The simple answer is no. Is there anyone close? My opinion is that Lisa Su at Advanced Micro Devices (AMD) may be catching up, but that's probably it.
Readers may also recall that I was hoping that NVDA would add a handle to what was still a developing cup pattern at the time. This way, we could move the pivot from the left side of the cup ($192) to the right. This has happened. We are not sure that the handle is done forming, but the new pivot is $170 and that allows us to set realistic targets and panic points.
Relative strength and the daily MACD are both working in favor of this stock without becoming technically overbought thanks to the new handle.
Target Price: $196
- Pivot: $170
- Add: on weakness down to the 21 day EMA, or on momentum above the 200 day SMA.
- Panic: on a break of the 50 day SMA.