- Nvidia will report its second-quarter results on August 24th, after the closing bell.
- On August 8, Nvidia announced disappointing preliminary results for Q2, indicating weaker gaming revenue.
- However, down 42% year-to-date, Nvidia stock may already indicate that demand concerns have already been priced in.
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What To Expect Of Nvidia’s Q2 Earnings
Nvidia investors have been burned by last quarter’s results. Despite strong financial numbers, Nvidia’s report did not please the market.
In Q1, Nvidia delivered an all-around beat in EPS and revenues, as usual. However, it left something to be desired in the guidance for the next quarter, which caused shares to plummet more than 10% right after the results were released.
Experts had expected Nvidia to provide guidance for Q2 sales of around $8.4 billion. However, the company disclosed that it expects numbers closer to $8.1 billion. According to the company, the more modest guidance was justified by the impacts of the Russia-Ukraine war and the COVID lockdowns in China through June of this year.
But perhaps the key bearish news was a slowdown in Nvidia’s gaming division. The company’s anticipated shortfall is likely to take place between July and October for the 4000 series GPU (graphics processing unit), according to Susquehanna analyst Christopher Rolland.
And things have gotten a bit worse. On August 8, Nvidia released preliminary Q2 results, indicating that second-quarter revenue will be $6.7 billion versus the outlook of $8.1 billion. This was driven by lower Gaming revenue. Shares fell about 4% after the preliminary announcement.
According to NVIDIA CEO and founder Jensen Huang: “Our gaming product sell-through projections declined significantly as the quarter progressed,”. He also said that macro headwinds are likely to continue affecting sales and initiatives are being taken with Gaming partners to adjust channel prices and inventory.
CFO Colette Kress made it clear that she maintains plans to proceed with stock buybacks as strong cash generation and future growth are forecasted.
The Tone Is Still Bullish on Wall Street
According to TipRanks, the sell side has been for a while now – and still is – very bullish on NVDA even though several price targets have been trimmed. The consensus remains a strong buy while there is no analyst with a sell recommendation on the stock. The current average upside opportunity is currently a respectable 37%.
Caution, when it surfaces among analysts, tends to revolve around Gaming. This is precisely why Morgan Stanley analyst Joseph Moore and Matt Bryson from Wedbush have neutral recommendations on Nvidia.
Moore cites that he expects the weakness in gaming to continue in the coming quarters, especially since preliminary results for the July quarter came in well below expectations due to a 44% sequential decline in this particular segment. Bryson is skeptical about gaming demand going forward, saying that there are still many unanswered questions.
Other analysts like KeyBanc’s John Vinh believe that the preliminary announcements in July have already pointed out the challenges Nvidia faced in Q2 and this has already been reflected in the share price. Piper Sandler analyst Harsh Kumar was not surprised by the decline in gaming revenues but was surprised by the size of the loss. He remained bullish on NVDA stock saying that:
“[We] have been waiting for both the gaming and data center businesses to slip up before getting constructive on the name again”.
Finally, Susquehanna analyst Christopher Rolland remains bullish on the company, despite reducing his price target from $220 to $210. He was upbeat on Nvidia’s announcements that it will continue with share buybacks plans and predicts strong growth in the future.
Our Take On NVDA
Nvidia has delivered near-flawless results in recent quarters. Investors have come to expect results at this level. But the now fully expected weakness in Gaming has put a damper on enthusiasm after the release of Q2 prelim results, leaving question marks regarding demand within this segment.
Nvidia stock trades at high multiples and is priced as a growth stock. The price-to-earnings ratio of 34.8 times is about 90% above the semiconductor industry average. This puts pressure on the company to continue to deliver impeccable results and continued growth.
But considering that Nvidia shares have dropped about 42% this year alone, challenges in Gaming may have already been priced in. Also, the near-term issues may have very little to do with Nvidia’s fundamentals and longer-term growth opportunities.
I believe that for Q2, the worst-case scenario has already been digested by the market since the preliminary results were reported. Thus, any indication of a slight rebound in Gaming could be bullish for the stock. This is why I believe Nvidia stock is a buy ahead of Q2 earnings.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)