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Summary

  • Nvidia is scheduled to report its Q2 FY21 results on August 19.
  • It’s likely that Nvidia beats the Street’s revenue estimates once again.
  • Investors should monitor its bifurcated financials and listen in on their management’s outlook regarding their future prospects to get a fuller picture of its state of operations.

Nvidia (NVDA) will be reporting its Q2 FY21 results on August 19. The chipmaker has outperformed the Street’s revenue estimates all five of its last five quarters so investors would be curious to see if the trend is repeated in its upcoming earnings report as well. Additionally, investors may also want to track its revenues from different end-markets, its management’s clarifications on some of the recent rumors and their outlook for the next quarter, as these items are likely going to determine where its shares head next.

Bifurcated Financials

Several major markets across the globe came out of their complete or partial lockdowns in the last quarter which had a variable impact on semiconductor firms such as Nvidia. Some are experiencing a long-lasting drop in customer demand while others are rushing in to fill empty sales channels. So, we need to understand where Nvidia stands in all of this and how much exactly did it benefit from international supply chains returning to normalcy.

(Source: Business Quant)

Nvidia’s management didn’t issue an end-market-level guidance in their last earnings call but I personally expect its data center revenues, which accounted for 37% of Nvidia’s total revenues in the last quarter, to rise sequentially based on broadly two reasons. First, its close industry comparables, Intel and AMD, saw their data center/enterprise sales rise quarter on quarter. This may not guarantee that Nvidia also posts similar growth numbers, but it at least goes to indicate that there’s isn’t major supply or demand-side shortfall as some might fear.

(Source: Business Quant Database)

Secondly, Nvidia announced the general availability of its data center-focused A100 GPU during the quarter which, per its claims, crushes rival offerings and even its own predecessor, the V100. If benchmarks are legitimate and if this chip is actually delivering a major performance boost over other offerings in the market, then it might just trigger an upgrade cycle amongst Nvidia’s enterprise clients, and boost its data center revenues starting with Q2 FY21.

(Source: Nvidia)

Nvidia’s gaming market, on the other hand, accounted for almost 44% of its total revenues in the last quarter. Its management had acknowledged during their last earnings call that the closure of retail space – retail stores and iCafes – were a limiting factor for their gaming sales. Here’s the relevant excerpt for your reference:

Early in Q1, as the epidemic unfolded, demand in China was impacted with iCafes closing for an extended period…Some of the pieces that we had seen related to COVID-19 in Q1 may carry over into Q2. COVID-19, in fact, had an impact in terms of our retail channels as well as our iCafes.

But global markets have variably reopened and supply chain logistics have returned to normalcy throughout the course of the current quarter which should, in theory, boost Nvidia’s gaming revenues. So, I’m expecting Nvidia’s gaming revenue in Q2 FY21 to rise sequentially, to at least reach close to its pre-COVID-19 level of $1.49 billion reported two quarters ago.

I’m also expecting Nvidia’s auto-revenues to drop on a sequential as well as on a year on year basis. The rationale is that auto sales were severely down during Q2 CY20, so automakers are likely to cut down on their non-essential capital expenditures over the course of the year, in a bid to better manage their finances. Its professional visualization revenue, on the other hand, is likely to remain flat on a year on year basis due to the lack of any positive or negative catalyst.

Overall, Nvidia’s management is guiding for their Q2 FY21 revenues to come in at $3.65 billion, plus or minus 2%, which is perfectly in-line with the analyst consensus. This goes to indicate that there’s no mismatch between the analyst community and Nvidia’s management when it comes to the company’s Q2 FY21 financial projections.

Outlook

Moving on, investment forums are rife with speculation with regards to Nvidia’s future prospects. This Bloomberg report, for instance, suggests that Nvidia is looking to acquire ARM Limited, a chip designer, from Softbank. This would be a significant buyout for Nvidia from a financial standpoint. I say this because ARM had revenues of $418 million in Q2 CY19 which amounts to a noteworthy 16% of Nvidia’s total revenues in the period. The deal could be in the vicinity of $32 billion – the amount Softbank shelled out to acquire ARM in the first place – or higher. So, investors should read into management’s comments on their upcoming earnings call to ascertain if these are just rumors or if the company is actively pursuing the buyout.

Additionally, unconfirmed reports suggest that Nvidia halted the production of its RTX 20-series Turing cards last month in a bid to clear its channel inventory and prepare for the commercial launch of its next generation RTX 30-series line-in September. There hasn’t been any official word on the launch date yet, so Nvidia’s upcoming earnings call would be an opportune time for its management to provide us with some clarity on the same. Its smaller rival, AMD, is reportedly planning to announce the general availability of its 7nm-based GPU line-up some time during Q3 so any unnecessary delays in Nvidia’s next-gen GPU line-up launch could contribute towards AMD’s share gains.

(Source: Business Quant)

Lastly, listen in on management’s revenue outlook for the next quarter. Also, what kind of demand and supply trends are they seeing in their top two end-market in terms of revenue generation — data center and gaming? The answers to these questions would provide us with clarity around Nvidia’s prospects. To put things in perspective, the Street is forecasting Nvidia’s Q3 FY21 revenue to come in at $3.96 billion, up 31.5% year on year.

Final Thoughts

It wouldn’t surprise me if Nvidia beat the Street’s revenue estimates of $3.65 billion in its upcoming earnings report. The chipmaker has exceeded the Street’s revenue forecasts in 17 of its last 19 quarters, so there’s an established history of outperformance. Also, Nvidia’s closest industry comparables, AMD and Intel, both outperformed the Street’s revenue forecasts in their recent results, driven by strong demand trends within the client computing and data center space. So, it’s likely that Nvidia also benefits from these industry tailwinds and it posts a yet another blockbuster earnings report.

But in all of this, I would recommend readers and investors to also pay attention to the finer details, such as its bifurcated financials, its management’s outlook for the next quarter along with some clarity on their rumored buyout of ARM Limited and their next-gen GPU launch timeline. These items are likely to going to determine whether Nvidia’s shares rally further or if they eventually begin stagnating. Good Luck!

Author: Business Quant

Source: Seeking Alpha: Nvidia: The Moment Of Truth

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