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Is Nvidia in Trouble? Or Is This a Buying Opportunity?

Sometimes, companies select to divulge earnings before their scheduled date. Nobody does this if outcomes are in line — it’s only done if they are both actually good or horrible. This choice to report early is an indication of honest administration as they want shareholders to know if anything drastic has occurred that could change the investment thesis.

Nvidia (NVDA -2.95%) did precisely that, selecting to launch its outcomes three weeks early. Unfortunately for buyers, the news was terrible. After the release, the inventory traded down around 8% but has since recovered those losses, after which some, because of the broader rally in the market.

That seems like an odd response to a terrible announcement, but the market typically does unusual things. So, was this rally really deserved, or should buyers beware? Let’s discover out.

The bad news

Nvidia skilled a troublesome quarter. While administration guided in Q1 for $8.1 billion in revenue throughout its 2023 fiscal yr second quarter (ending July 31), Nvidia only brought in $6.7 billion. That’s a 17% miss, a rarity for a reliable company like Nvidia. However, taking a glance at Nvidia’s five segments reveals rather more.

Q2 Revenue
QOQ Growth
YOY Growth
Gaming $2.04 billion (44%) (33%) Data Center $3.81 billion 1% 61% Professional Visualization $0.50 billion (20%) (4%) Automotive $0.22 billion 59% 45% OEM and Other $0.13 billion (12%) (66%)

Source: Nvidia. Chart by writer. QOQ = quarter over quarter. YOY = 12 months over yr.

The two smaller segments hardly make up any of Nvidia’s revenue, so they aren’t worth digging deep into. Professional visualization is barely bigger however dependent on discretionary enterprise spending, which is why it had a challenging quarter.

The most obvious outcome was gaming’s important year-over-year (YOY) drop. Management pointed to declining gross sales as a result of weaker end-demand regardless of providing its merchandise to distributors. Clearly, this weak spot isn’t a supply chain problem; it’s a demand one.

However, this isn’t stunning as its gaming division also supplies the GPUs (graphics processing units) that crypto miners make the most of. With the decline in crypto costs and rise in power costs, it’s not as worthwhile (and in some circumstances unprofitable) for miners to run their operations, not to mention buy new tools. The crypto impact and shoppers tightening their spending triggered Nvidia to miss outcomes drastically.

To make matters worse, Nvidia slashed costs to try to increase demand, causing its gross margin to drop. Of course, companies can survive if their gross margin falls a few factors — however Nvidia’s dropped from 66.7% final year to 43.7% this year. A important decline demonstrates Nvidia has no pricing power when occasions are bad — a horrible sign for buyers and Nvidia alike.

On the positive aspect, Nvidia’s knowledge middle enterprise had its greatest quarter ever, though administration famous complete income fell wanting expectations. Still, this could be a shiny spot for Nvidia. While corporations could also be tightening their bills, the long-term pattern is for a migration to the cloud, which will benefit this division over the lengthy haul.

With all this dialogue about income, it’s easy to overlook to check the bottom line of an item that matters: profits. Using Nvidia’s preannouncement numbers, Nvidia should post a net income of about $653 million. While down from FY 2022’s second-quarter profits of $2.4 billion, it’s at least in optimistic territory.

All eyes and ears shall be on the official earnings release (these preliminary numbers can nonetheless change) on August 24, when management will subject questions and provides the all-important Q3 projections.

I’ll be in search of a couple of objects. First, I’ll need to hear administration talk about the crypto effect, as they’ve typically shied away from it. Second, I’d wish to learn concerning the future state of the info center division as a result of it retains Nvidia’s results afloat. Finally, I’ll be looking for administration to lay out a path forward to regain its gross margin, which can boost income.

Is there a reason to buy Nvidia stock now?

While I’m a long-term Nvidia bull, there’s a lot of uncertainty surrounding the corporate over the next few months. If the stock was down significantly after the announcement (say 10% or more), I may really feel differently. But there is no method you can convince me Nvidia’s inventory ought to be larger now than before this announcement. But that’s the case.

With the stock trading for a hefty 50 times earnings (this quantity will go up as soon as official earnings are launched as a outcome of denominator within the ratio dropping), it is not low cost either.

I’m not promoting my shares, however I’m not including either. After I hear what management says, I’ll have a better thought of what’s going on. After all, they’ve already handled a crypto crash that considerably affected earnings in 2018 and 2019. Nvidia emerged simply as strong from that headwind, and I suspect it’ll do the identical this time, too.

But there’s plenty of pain and dangerous news between now and a full restoration, and there will be much better entry points alongside the means in which.

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