Nvidia Analysts Preview Q2 Earnings: A Challenging Near Term, But Out Years Hold Promise

Chip stocks are being hit by the double whammy of trade tensions and a lackluster semiconductor industry cycle, although some in the sector did manage to report forecast-beating results.

NVIDIA Corporation NVDA is the last of the major chip companies to unveil its quarterly results, with the graphics chipmaker scheduled to release its first-quarter results Thursday after the market close.

Consensus Expectations

Nvidia, on average, is expected to report second-quarter earnings per share of $1.14, a sharp decline from the $1.94 reported a year ago.

The consensus expectations call for an 18.5% year-over-year decline in revenue to $2.55 billion.

Bank of America Merrill Lynch analyst Vivek Arya expects fairly in-line revenue at $2.54 billion.

UBS analyst Timothy Arcuri expects quarterly revenue of $2.57 billion and EPS of $1.16, although he did caution about a slight downside vs. Street estimates on data center weakness.

Data Center A Key Driver of Stock Multiple

The consensus estimate for Nvidia's second-quarter data center revenue is at $677 million, up 7% sequentially but down 11% year-over-year, BofA's Arya said in a note. 

Citing mixed commentary from peers, the analyst said he sees downside to the Street estimate of $764 million for third-quarter data center revenue. 

Arya expects data center trends to remain tough in fiscal year 2020 due to capex digestion in the second half of 2018, especially in AI training and tougher supercomputing comps.

UBS' Arcuri agrees with Arya, as he sees the potential for an up to $100-million risk to Street estimates for the second half.

See also: Stock Wars: Intel Vs. AMD Vs. Nvidia

Q3 Headwinds Abound

BofA is bracing for a third-quarter revenue outlook about 5-7% lower than the consensus due to negative catalysts that include shipping restrictions to China and/or a sluggish cloud capex environment.

Even if the company manages to aim at a mix shift away from data center and toward a gaming and NINTENDO LTD/ADR NTDOY console-driven beat, gross margins could suffer, the analyst said.

Nvidia could suggest a return to a normalized gaming environment and an end to crypto currency headwinds, he said. 

Gaming is likely to pick up steam, UBS' Arcuri said, pointing to recent revenue trends at key partners and a ramp in new Turing-optimized content for the holidays.

The analyst said the the launch of a new 7nm data center product refresh is an important catalyst for the second half.

"Field work supports silicon by YE19, shipping in early 2020 meaning next year should see product cycles across ALL major segments." 

Arcuri expects Street estimates for the October quarter to be biased somewhat lower, although he said they could be offset by the "RTX-driven gaming cycle in the holiday season."

Valuation Reflects Muted Expectations

Nvidia's shares have lagged the semiconductor sector and the S&P 500 Index, and the 30% compression in next-12-month P/E since the company's last earnings call suggest fairly muted expectations, according to UBS. 

The tough near-term fundamentals are largely expected, in BofA's view; Bloomberg options suggest a 7.4% stock move after the print. 

"Despite our near-term caution, we maintain our Buy on NVDA, a top large cap pick, as it is one of the few semiconductor companies capable of growing sales at a 15%+ annual pace or 3x the sector, with substantial leverage with a common architecture that can address gaming, AI, workstations and advanced automotive," Arya said. 

Heading into calendar year 2020, BofA expects Nvidia to benefit from new 7nm technology, a broader adoption of ray tracing, cloud capex recovery and the potential closure of the accretive Mellanox Technologies, Ltd. MLNX transaction.

UBS maintained a Buy rating on Nvidia with a $195 price target.

BofA maintained a Buy rating and a $225 price target.

The Price Action

Nvidia shares are up about 16% year-to-date, although they are down about 20% from their intra-day high of $193.47 for the year.

The stock was down 3.7% at $150.28 at the time of publication Wednesday. 

Related Link: Analysts Dissect Nvidia's Product Announcements: 'Evolutionary Rather Than Game-Changing'

Photo courtesy of Nvidia.