NVIDIA Earnings Preview: Demand Recovery In Focus As Stock Rallies 50%
Haris Anwar | Nov 14, 2019 13:03
A strong and impressive rally in NVIDIA (NASDAQ:NVDA) (NASDAQ:NVDA) shares during the past six months signals that the worst for this chipmaker is over and the demand recovery is well on track.
When the Santa Clara, CA-based chipmaker releases its third-quarter earnings tomorrow, investors will be keen to see that this rebound is strengthening. NVIDIA (NASDAQ:NVDA) has seen inventory levels build and buyers delay purchases since Q4 2018. The company’s revenue stream has been hit hard by the industry-wide slowdown, particularly in demand for chips used in gaming and data-centers—NVIDIA's two largest revenue-generating units.
Earlier this year, the roiling U.S.-China trade war and a global economic slowdown forced the company’s largest buyers to delay their purchases. These macro headwinds stopped NVIDIA (NASDAQ:NVDA) growth as its sales shrunk from a year earlier for three straight quarters.
According to the company forecast, sales will shrink by about 9% in the third-quarter, after the 17% contraction in the second quarter. But the rate of decline in sales is slowing, prompting some analysts to call a bottom in the current downturn.
In the second-quarter, sales of gaming-chips surged 24%, while revenue from NVIDIA’s second-biggest business, data-centers, climbed 3.3% from the prior period. These results have vindicated Chief Executive Officer Jensen Huang, who has argued that a slowdown in orders for computer-gaming chips and processors for artificial intelligence tasks was temporary as customers worked through stockpiles of unused parts.
Chip stocks have surged on hopes that the U.S.-China trade war will reach a settlement and demand will improve. The Philadelphia Semiconductor Index has gained 48% in 2019. In the same period, NVIDIA (NASDAQ:NVDA) stock has surged about 50%, trading at $208.57 a share at yesterday's close.
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Despite the faith that investors have shown in general for the world’s largest chip-makers this year, some recent earnings reports show that recovery in demand is on weak ground. Last month, Texas Instruments (NASDAQ:TXN) (NASDAQ:TXN) raised alarms with a fourth-quarter revenue forecast that trailed the lowest estimate on Wall Street.
Intel (NASDAQ:INTC) (NASDAQ:INTC), on the other hand, reported stronger third-quarter earnings and again raised its full-year outlook. Intel, the largest chip maker in the U.S. by revenue, highlighted demand for its products used in data-centers — a segment also crucial for NVIDIA (NASDAQ:NVDA) to produce growth.
Besides the cyclical slowdown, another major concern that could hit NVIDIA (NASDAQ:NVDA) is related to the continued rift between the U.S. and China on their trade ties. The Asian nation generates roughly 20% of the company’s revenue.
NVIDIA (NASDAQ:NVDA) has invested heavily in China, where many of its chips are used for assembly into other products, especially in industries related to artificial intelligence. NVIDIA executives are concerned that if the world’s two biggest economies failed to resolve their dispute, it will prompt Beijing to accelerate its efforts to reduce reliance on U.S. chip producers by nurturing homegrown competitors, eating into NVIDIA’s long-term business.
Bottom Line
A broad-based recovery in semiconductor stocks suggests that investors are feeling more comfortable in holding these shares even though the U.S.-China trade deal remains a work-in-progress and some threats to global growth are still lingering.
We continue to recommend a cautious approach toward chip stocks as their gains aren’t based on a solid turnaround in demand. NVIDIA’s earnings report today might help to remove some uncertainty.
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