Nvidia's (NVDA) Q1 earnings are expected to close on Thursday after close. In Q1, the company's revenue split was as follows:
Management estimated Q1 revenues were approximately $ 2.2 billion, with a margin of approximately 59%.
For this reason, we were negatively negative for Crypto Burst and Advanced Micro Devices (AMD) in terms of Nvidia outlook as well as market share gains from competitors. With these headwinds Nvidia had a difficult task to fulfill its already low Q1 forecast. In addition, Nvidia has experienced additional headwinds since the start of the quarter:
- The data center is weaker than expected, according to Intel (INTC) results.
- Although Nvidia appeared to be the channel behind the end of GPUs, the new RTX products required unusual price reductions mid-quarter.
- There is evidence that channel inventory remains at the lower end of the GPU market.
We see, therefore, that Nvidia misses the already challenging Q1 manual. We expect the following revenue breakdowns in the first quarter:
Gaming: $ 850 million; Pro: $ 290 million; Data Center: $ 600 million; Car: $ 150 million; OEM and IP: $ 110 million
First quarter revenue estimates are $ 2.0 billion, a failure of $ 200 million for forecast and consensus. We also expect Nvidia to lose around 300 basis points to bring sales to $ 2 billion. As a result, Nvidia is likely to face a much bigger bust on the EPS front.
It is possible that Nvidia has completed the quarter with predictive deliveries as in the past. In this case, the balance sheet will show signs of encumbrance. We will see.
Although the first quarter results will be interesting, the true risk for Nvidia shares lies in the guidelines. Not only does the first quarter look anemic, the company also faces several major pressures for the remainder of fiscal year 2020:
- The US trade war with China is likely to have a negative impact on the 2020 fiscal year.
- Low graphics inventories are expected to survive the second quarter in the 3rd quarter.
- AMD continues its product roadmap and has now confirmed that Navi, a competitor in the mainstream GPU market, will hit the market in the 3rd quarter. This will make Nvidia's second half of fiscal year 2020 increasingly difficult.
- And finally, AMD will defeat Intel at the high end of the desktop and server CPU markets in the third quarter, and AMD's CPUs will otherwise earn a significant share of Nvidia's GPU business.
If our assessment is accurate, it is unsustainable for Nvidia's management to maintain its current guidance for fiscal year 2020. As such, it would be easy for management to blame the trade war and now reduce the guidelines without facing the challenges of competition. As a result, we now expect that Nvidia's management will reduce sales guidance for the 2020 fiscal year by approximately 10%. Analysts and investors will struggle to achieve earnings per share of more than $ 4, and downgrades are likely.
Such a move may cause the stock to narrow below its 52-week low at $ 127.
Looking to the future, we expect investors to increasingly deal with the reality that:
- Much of the hyper-growth fueling the Nvidia rating was due not to games but to cryptography, and that this segment is now largely irrelevant.
- Both the gaming and data center markets are losing market share and losing more and more to AMD.
- Autonomous driving, supposedly the next growth driver for Nvidia, remains a futuristic market with no prospect of significant short-term revenue.
- Nvidia has overpaid Mellanox and Mellanox will only marginally help with Nvidia's growth challenges.
We continue to believe the company's fair value is closer to $ 50.
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Disclosure: I am / we are a short NVDA. I wrote this article myself and it reflects my own opinion. I can not get any compensation for it (except from Seeking Alpha). I have no business relationship with a company whose shares are mentioned in this article.
Additional information: Long AMD