Nvidia Caution Abounds as Earnings Come After Rough Season

(Bloomberg) -- Nvidia Corp. is set to release its first-quarter results at the tail end of a reporting season that has shown few signs of a recovery in chip demand. That’s making Wall Street nervous.

Analysts’ chief concern is Nvidia’s data center business. Sales in that segment contracted for the first time in three years in the fourth quarter, which the company attributed to a pause in spending by hyperscale cloud companies. Intel Corp., the world’s second-largest chipmaker, put that characterization in doubt last month when executives projected its 2019 data center sales would shrink for the first time in a decade.

“Data center may be the biggest risk,” in Thursday’s earnings report, Christopher Rolland, a Susquehanna analyst, wrote in a research note.

Nvidia’s data center success has been a central theme in Chief Executive Officer Jensen Huang’s pitch that the company is much more than a graphics chipmaker now as its technology has become central to growing demand for artificial intelligence-based data processing. While gaming is still the biggest contributor to Nvidia’s sales, data center has been increasing. It accounted for nearly a third of revenue in the fourth quarter.

Nvidia’s total first-quarter revenue is expected to shrink 32 percent from a year ago, a result of a cryptocurrency mining market collapse that caused a rapid drop in orders for its graphics chips traditionally used for gaming. That’s placed extra emphasis on new markets such as automotive and artificial intelligence-based data processing to drive growth.

Wall Street’s optimism has faded fast as Nvidia’s shares slumped 45% from a record in October. The total number of buy ratings has dropped to 25 from 32 in five months as analysts reduced their price targets, according to data compiled by Bloomberg. Nvidia shares fell 0.4% to $158.96 at 10:07 a.m. in New York.

Read more: Goldman Says Nvidia Options Underestimate Post-Earnings Move

Data center challenges and lower revenue in the desktop PC gaming market may make it difficult for the Santa Clara, California-based company to meet its fiscal 2020 revenue forecast of flat to slightly down, according to Stifel analyst Kevin Cassidy.

“We are cautious on Nvidia shares in front of its earnings report,” wrote Cassidy, who has the equivalent of a neutral rating on the stock. “We believe the company will be challenged to meet its full year guidance for revenue.”

Just the Numbers

• 1Q revenue estimate $2.20 billion (range $2.08 billion to $2.24 billion); forecast $2.2 billion
• 1Q adjusted EPS estimate 81c (range 72c to 87c)
• 1Q adjusted gross margin estimate 59.0%; forecast 59.0%
• Fiscal 2020 revenue estimate down 5%; forecast flat to slightly down

Data

• 25 buys, 11 holds, 4 sells
• Avg PT $184.44 (14.9% upside from current price)
• Implied 1-day share move following earnings: 9.7%
• Shares rose after 7 of prior 12 earnings announcements
• Adjusted EPS beat estimates in 11 of past 12 quarters
• Quarter dividend BDVD est. 16c per share, year ago reported 15c; next declaration date May 16, 2019

Timing

• Earnings release expected 4:20pm (New York time) May 16
• Conference call website

To contact the reporters on this story: Jeran Wittenstein in San Francisco at jwittenstei1@bloomberg.net;Ian King in San Francisco at ianking@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Steven Fromm

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