There has been a massive recovery in the semiconductor space over the past few weeks, suggesting bargain hunters went shopping after seeing many chip powerhouses such as Nvidia (NVDA) suffered declines, leading to 52-week lows.
Driven by prolonged supply chain headwinds and monetary policy tightening, Nvidia shares have been under pressure for much of the year. Higher interest rates combined with concerns about a slowing economy has sent NVDA stock lower 46% over the past year, compared to 14% decline for the S&P 500 index. This is even though the chip giant has navigated through these headwinds to produce revenue and earnings beats in thirteen straight quarters. Now might be an ideal time to bet on a sustained recovery.
The semiconductor specialist will report third quarter fiscal 2023 earnings results after Wednesday’s closing bell. Investors will get a glimpse of what the next quarter and full year will look like when analysts speak to management. The company recently announced alternative chips for China to clear U.S. export restrictions which could have had adverse revenue impacts of $400 million. “The A800 meets the U.S. government’s clear test for reduced export control and cannot be programmed to exceed it,” the company said.
Prior to the chip announcement, the company’s weak outlook had dampened growth expectations, causing a 10% plunge in the stock after it warned of disappointing Q2 gaming revenue. Meanwhile, the sector has also suffered a decline in average selling prices, which analysts believe will impact the company’s gaming revenue and datacenter revenue. To reverse the stock’s decline the company on Wednesday will need to talk positively about its growth prospects for the next quarter and beyond.
For the three months that ended October, Wall Street expects the Santa Clara, Calif.-based company to earn 70 cents per share on revenue of $5.8 billion. This compares to the year-ago quarter when earnings came to $1.17 per share on revenue of $7.10 billion. For the full year, ending in January, earnings of $3.35 per share would decline 24.5% year over year, while full-year revenue of $27.02 billion would rise 0.4% year over year.
The bearishness in the stock has driven by the company’s expected year-over-year declines in earnings and revenue which suggests a meaningful deterioration of business fundamentals, particularly in the graphics unit. The weak gross margins, due to declining prices, have also taken down Nvidia’s earnings growth estimates significantly. Nvidia’s second quarter figures were inline with the company’s release of preliminary results. Q2 revenues were $6.7 billion, up 3% year-over-year, but declined 19% compared to Q1.
Waning demand and lower prices impacted Nvidia’s gross margins which fell to 45.9%, marking a sequential decline of 21.1 percentage points. The Gaming segment, which reported 44% sequential drop in revenues, was the main cause of the drop in revenues and gross margins weakness. Meanwhile, the company’s operating expenses surged by 36% year over year, highlighting the disparity between the 3% revenue gain, which pressured operating income lower by 80%, while net income was down by 72%.
But it wasn’t all bad news. Datacenter revenues soared 61% year over year to $3.8 billion, driven by increased demand of Nvidia’s computing platforms that support data analysis. During the quarter, the Datacenter business surpassed the Gaming segment as the top revenue generator. However, the company issued weak guidance, forecasting revenues of $5.9 billion (plus or minus $118 million). This would mark a sequential decline of 12%.
However, assuming this quarter is end of the down cycle, Nvidia could be gearing up for a recovery next year. As such, the guidance on Wednesday will be the key factor in the stock’s near-term direction.
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