Earnings Outlook: Nvidia earnings: One more shoe to drop for beleaguered chip maker

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Nvidia Corp. has one more shoe to drop following a quarter where the chip maker cut its outlook twice.

Nvidia NVDA, +0.51%  is scheduled to report fourth-quarter earnings after the market closes on Thursday. The Santa Clara, Calif.-based chip maker recently cut its outlook for the second time in three months, citing weakness in China and slow gaming chip and data-center sales. Back in November, Nvidia cut its outlook for the fourth quarter during its previous earnings report, citing excess inventory of its midrange Pascal-architecture gaming chipsets, the older generation to the company’s recently released Turing-architecture line of chips.

“Looking forward, we are confident in our strategies and growth drivers,” Nvidia Chief Executive Jensen Huang said in a statement following the last outlook cut.

Read: Nvidia is latest sign that the cloud boom is dying

Now, it is time for Huang and Nvidia to look forward on the record, with a 2019 forecast that will prove their fourth-quarter issues were temporary, or the unfortunate opposite. Oversupply and inventory issues along with trade war concerns with China have battered the outlooks of many chip makers even as the industry in 2018 topped annual global sales of one trillion chips for the first time.

The largest chip makers, including Intel Corp. INTC, -0.79% Taiwan Semiconductor Manufacturing Co. TSM, -0.87% and Texas Instruments Inc. TXN, +0.66%  , have predicted a cautious start to 2019, while Qualcomm Inc.’s QCOM, -0.51%  forecast outlook range bookended Wall Street estimates and Advanced Micro Devices Inc. AMD, +1.68%  proved to be an outlier, offering the most bullish 2019 outlook so far. Analysts on average expect Nvidia to collect $11.41 billion in revenue in the just-begun fiscal year, according to FactSet.

Read: AMD’s Lisa Su takes center stage at CES, taking aim at Intel and Nvidia

Nvidia investors expect a weak report on Valentines Day after multiple warnings about the fourth quarter. The question is if they will want to break up after seeing what’s to come.

What to expect

Earnings: Of the 28 analysts surveyed by FactSet, Nvidia on average is expected to post adjusted earnings of 70 cents a share, compared with $1.57 a share reported in the year-ago quarter. The current estimate is down from $1.85 a share expected at the beginning of the quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $1.19 a share.

Revenue: Wall Street expects revenue of $2.29 billion from Nvidia, according to 29 analysts polled by FactSet. That’s down from $3.42 billion Wall Street had forecast at the beginning of the quarter. In the year-ago period, Nvidia reported revenue of $2.91 billion. Nvidia now predicts revenue of $2.16 billion to $2.24 billion. Estimize expects revenue of $2.5 billion.

Nvidia’s revenue is broken down into five segments: Gaming, data center, professional visualization, automotive and “OEM & IP,” or original equipment manufacturers and intellectual property. Analysts on average expect third-quarter gaming revenue to drop 41% to $1.02 billion from the year-ago quarter, data-center sales to rise 14% to $692.2 million, professional visualization sales to rise 20% to $303.9 million, auto sales to rise 33% to $175.4 million and OEM & IP revenue to decline 26% to $134.1 million.

Should Nvidia’s sales meet current Wall Street expectations, the chip maker’s calendar 2018 revenue is looking at a 23% gain to $11.65 billion.

Stock movement: Nvidia shares are down 27% since the company’s last earnings report, while the S&P 500 index SPX, +0.07% is down 1.1%, the tech-heavy Nasdaq Composite Index COMP, +0.14%   is up 0.3%, and the PHLX Semiconductor Index SOX, -0.11%   is up 5.5%. For the year, Nvidia is up 11%, the S&P 500 is up 7.7%, the Nasdaq is up 9.8%, and the SOX index is up 13%.

What analysts are saying

Nvidia’s stock took some heat from the analyst community following the last outlook cut. In his double downgrade of Nvidia to an underperform from a buy, Needham analyst Rajvindra Gill said the continuing deceleration of the Chinese economy will curb end demand for the company’s core products in gaming and data center.

“While Nvidia does not break out its specific Chinese gaming exposure, desktop gaming is hugely popular in China and a big market for Nvidia,” Gill said. “Deteriorating conditions in the Chinese economy have adversely affected purchases of graphics cards, particularly high-end RTX GPUs.”

On the data-center side, while a slowdown in purchases from U.S. companies like Amazon.com Inc. AMZN, -1.62% Microsoft Corp. MSFT, +0.38%  and Alphabet Inc. GOOG, -0.33% GOOGL, -0.32%  is driven mostly by digesting overbought inventory, it’s a different story for Chinese cloud companies like Alibaba BABA, +0.24% Baidu BIDU, -0.98%  and Tencent 0700, -0.58% Gill said.

“The deceleration in the Chinese economy has hurt hyperscaler infrastructure spending and in turn GPU purchases,” Gill said. “We will have to monitor if we see a return to normalized cloud purchases by the Chinese and U.S. hyperscalers.”

In the minority optimist corner, UBS analyst Timothy Arcuri used the occasion of Nvidia’s reduced outlook to upgrade the stock to a buy and increase his price target to $190 from $180 because the company had reset its revenue enough “that we have catalyst path.”

“We don’t yet know revenue splits, but in gaming we feel confident that it is now materially under-shipping demand,” Arcuri said. “In data center, low accelerator penetration did not insulate against capex deceleration as expected, but it is very hard to believe this is anything but timing.”

Of the 36 analysts who cover the stock, 24 have buy or overweight ratings, 10 have hold ratings and two have sell or underweight ratings, with an average price target of $179.00, down from an average $225.83 at the beginning of the year.

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