It’s all smiles for the owners of Nvidia (NASDAQ:NVDA) stock right now following its better-than-expected earnings report. But if you have NVDA stock, don’t get too comfortable.
For one thing, its earnings beat was largely driven by its gaming sales that were less bad than expected. That’s good enough to salvage this quarter, but not necessarily anything beyond that. Macro concerns weigh heavily on the outlook of Nvidia stock going forward. And don’t expect the recent revival of cryptocurrency prices to do much for NVDA stock either. Add it all up, and even with the earnings bump, Nvidia stock is still trending downwards.
The Earnings Beat Is Less Impressive Than You Think
Looking at just the company’s Q1 earnings per share, the owners of Nvidia stock could be forgiven for thinking NVDA had a great quarter. Its non-GAAP EPS of 88 cents smoked analysts’ consensus outlook of 81 cents. Its revenues of $2.22 billion also came in slightly ahead of the consensus estimate. But the news gets worse for Nvidia stock once you take a closer look at the numbers.
For one thing, nearly all of the revenue beat was driven by the gaming division. Gaming revenues came in at $1.05 billion, far ahead of analysts’ average estimate of $930 million. Moreover, its gaming sales jumped versus the previous quarter, ending a nasty serious of declines.
The significantly better-than-expected results in gaming covered up some pretty lackluster numbers everywhere else, however. Sales of professional visualization products dropped from $305 million in Q3 of 2018 to $292 million last quarter. OEM and other products slumped again, dropping 15% year-over-year in Q1 against expectations for a far smaller decrease.
In data-center chips, there are signs that Intel (NASDAQ:INTC) may be outpacing Nvidia. NVDA’s data-center revenue came in at just $634 million for the quarter, down sharply from $679 million the previous quarter and almost $800 million two quarters ago. Not surprisingly, NVDA’s data-center results fell well short of expectations.
It seems that Nvidia’s gaming results have taken a turn for the better. But that’s hardly enough to leave Nvidia stock poised to do well for the rest of 2019, since its other important potential growth areas like data center can’t seem to get back on track. NVDA’s guidance for the current quarter wasn’t anything special either, indicating its Q1 results may have been just a one-off fluke.
Don’t Count on Bitcoin to Save Gaming
In the past, there was a significant correlation between the price of Bitcoin and NVDA stock. And given that NVDA’s quarterly “gaming” revenues plummeted from $1.8 billion in early 2018 to half of that last quarter, clearly crypto miners had been generating much more demand for graphics cards than gamers.
But don’t expect the recent revival of Bitcoin prices to make a lasting difference for NVDA stock. This is due to a key concept called Bitcoin dominance. In the golden days of crypto, the market cap of all crypto coins topped $500 billion. It’s barely back to $100 billion today. Bitcoin has come roaring back, but many of the alternative crypto coins remain in the dumps.
That is critical for Nvidia stock, since few people use Nvidia or AMD (NASDAQ:AMD) cards to mine Bitcoin. Instead, they use more specialized products from other vendors. However, it is profitable to mine many of the alternative coins with NVDA cards. But if altcoins aren’t surging in price, demand for Nvidia’s cards will remain in check.
As it is, Bitcoin’s share of the overall crypto market has surged from just 33% in January 2018 to nearly double that recently. Meanwhile other alternatives, like Ethereum, which can be mined with Nvidia’s tools, have become far less popular. Ethereum’s share of the overall crypto market has now fallen to its lowest point since late 2017.
Meanwhile, the third most popular coin, Ripple, is not mineable at all, negating any need for graphics cards. If the crypto community doesn’t rally around more alternative coins, a further rise in Bitcoin’s price is unlikely to do much for Nvidia stock.
The Verdict on Nvidia Stock
On its earnings conference call, NVDA noted that its outlook was weaker than it was when Q1 had started. That should hardly be a surprise. The trade war has escalated far more than most of us, myself included, had expected. NVDA has been caught in that crossfire.
While the stock market has recovered recently, U.S.-China tensions are still simmering.. The Trump administration’s recent decision to take aim at Huawei could lead to a further cooling in demand for American semiconductor products from China.
When it comes to Nvidia stock, don’t expect a potentially short-lived recovery in crypto prices to offset much bigger macro factors. NVDA is trying to adjust to life without a huge stream of crypto revenue. It still has to make much more progress in that area, as Q1’s more than 30% revenue decline compared to the same quarter last year shows. And with weakness showing up in other areas like data center, NVDA still has a long ways to go before it regains its previous level of prosperity. For now, expect NVDA stock to keep trending lower.
At the time of this writing, Ian Bezek owned INTC stock. You can reach him on Twitter at @irbezek.