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Nvidia: Mitigating Our Imminent Bearish – NVIDIA Corporation (NASDAQ: NVDA)



We are bears of Nvidia Corporation (NVDA) since September 2018. The last time we reported on this company, we forecast a pretty miserable profit margin for the next 12 months. Specifically, we said:

The downgrades are only starting, however, as the NVDA hopes for a very strong second half of the year, as evidenced by its bloated stocks that this will not happen. It also does not look much better from the point of view of earnings, as the NVDA expects higher operating costs this year. We estimate that earnings per share for the NVDA will only be $ 2.28.



After the first quarter's actual results were known by 2020, NVDA's bulls jumped for joy as the company undercut diluted estimates and then sold the stock as the company refused further forecasts for the year leave. We looked at the results and broke down what bulls and bears do for them.

Key Figures

Our main thesis, when we recommended the sale of stocks last year, was that revenues stagnate or fall. The same leverage effect that boosted earnings will begin to decimate it. In Pik, we saw a 33% decline in sales and a 68% decline in profits this quarter.



Source: NVDA 10-Q

The results were horrendous in all segments, especially in gaming. NVDA bulls discovered the hard way the cryptocurrency cop had actually driven much of the company's earnings, and in his absence, everything fell off the beaten track.



Source: NVDA 10-Q

The United States was by far the worst geographic situation for the company, with revenue down 60% year-on-year.



Source: NVDA 10-Q

Guide

NVDA's earnings forecast frightened the cops when management refused to provide a full-year outlook, warning of persistent weakness in the data center and impact of CPU shortage. However, it was a forecast for the next quarter.

NVDA generated sales of approximately $ 2.55 billion, which was frankly above the expected level. The company also expected a GAAP margin of 59.2% and operating expenses of $ 985 million. Building on this, we can forecast the result for the next quarter (GAAP).



Source: author's calculations

These are some massive declines compared to the previous year, with only operating costs rising.

Valuation and Market Expectations

Analysts expect NVDA revenues and earnings to plummet fairly quickly and to see an uptick soon.



Source: Yahoo Finance

They continue to forecast growth of more than 35% over the previous year, their estimates have moved down. About three months ago, they still forecast $ 7.13 / share for fiscal 2020.



Source: Yahoo Finance, January 31, 2019

The current quarter, with effective earnings per share of approximately $ 3.00 a year estimates the NVDA at a plus of 50 P / E ratio. This is an extremely expensive zone for a stock that will see a 18% drop in sales in the coming quarter. It is not uncommon for investors to reprimand such stocks by a single digit multiple of multiples. So the cops hope for a big turnaround at 50X and one that will arrive soon. Analysts who have a generally positive view of the stock expect the multiplier to shrink over growth in the later quarters of the year.



Source: Yahoo Finance

Where is our thesis [19659026] From our point of view, we were disappointed that gross margins held up so well and the NVDA for the next quarter in this area a higher forecast presented. This was definitely not the result we were looking for. Sales also held up better in light of the rather brutal USD strength. Both events mitigated our short-term bear market. Finally, NVDA managed to improve its sales forecast while cleaning up some stocks.



Source: NVDA 10-Q

Thus, the case with the very high downside risks is reduced for now. YCharts is showing the numbers from the last quarter, but the forward-looking numbers are still at 124 days, and we're curious to see how long NVDA can break the break even point.

  Chart

YCharts data

Regardless of margins, we do not believe that the NVDA can achieve growth in the second half of the year, and this should drive the stock down.

Why GAAP profits?

One thing that investors might be curious about is why we ignore this The nonsense non-GAAP number that NVDA continues to report. The answer from us is that stock-based spending is real and puts a lot of pressure on the company. In the next quarter, more than $ 220 million will be deducted through stock-based compensation. Keep in mind that over the last three years, the NVDA has repurchased its own shares at an annual average of approximately $ 1 billion.



Source: NVDA 10-K 2019

So if it pays $ 880 million In terms of stock-based compensation, investors need to have an ostrich mentality to ignore these costs.

Conclusion

NVDA is unbelievably expensive for a company with a 30% drop in sales. The bear theory has dented slightly as the company has kept margins better than we would have thought possible in this environment. The flip side is, of course, that we have not yet experienced a recession. We will probably do this someday, and most likely the gross margins of the NVDA will make their swan dive at this time. Even assuming that the gross margin drops to only 55%, NVDA does not generate profits and generates revenues of approximately $ 7.2 billion a year.



Source: author's calculations

In the quarter to the end of April, we were close to this sales mark in 2017, about two years ago, before the crypto-mining and data center "soap bubbles" simultaneously increased NVDA's revenue. It will not be nice if we go back there. We remain bearish but more cautious as the NVDA surprised us this quarter.

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Disclosure: I am / we are short NVDA. ] I wrote this article myself and voiced my own opinion. I can not get any compensation for it (except from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.

Additional Disclosure: Please note that this is not a financial advice. It may sound like it sounds so, but surprisingly it is not. Investors are expected to exercise their own care and contact a professional who knows their goals and limitations.

Also note that investors who are short stocks are always biased, unlike investors who are long stocks and always completely objective.

TIPRANKS: SELL


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