Nvidia (NASDAQ:NVDA) has pleased investors with its latest earnings report. Nvidia stock traded sharply higher to close the week, with shares advancing more than 7%. The sector also got help with peer Applied Materials (NASDAQ:AMAT) posting solid earnings as well.
How much will this earnings report matter to Nvidia’s longer-term trajectory, however? I argue that these results will do little to shake Nvidia out of its recent funk. As we’ll see, Nvidia is making the best of a bad macroeconomic environment. But make no mistake, it will be hard for NVDA stock to rally given the factors that are outside of its control.
Gaming Powers a Solid Quarter
For the second quarter, Nvidia beat both earnings and revenues estimates. Revenues topped expectations by a fairly modest $40 million, however, earnings came in hot at $1.24 against the market’s outlook for just $1.15 per share. As you might have guessed, the big earnings beat came largely from stronger profit margins rather than better than expected sales.
The stronger profit margins line up with another encouraging trend: declining inventories. Nvidia’s inventories fell to $1.2 billion from $1.43 billion previously.
Importantly, Days Sales of Inventory “DSI”, a metric that tracks how many days of inventory a company has ready to go, plummeted from 140 to 106. This indicates that conditions within the industry appear to be returning toward average and that the chip glut is largely behind us.
Nvidia scored big in gaming in particular. It pulled in more than $1.3 billion in gaming revenues for the quarter. Yes, that figure still slumped 27% from the same quarter last year. But it rebounded 24% from the previous quarter of 2019 as Nvidia notched record gaming laptop sales and launched new product lines for desktop gamers, and video creators.
Nvidia expects this positive momentum to continue as a line of highly-anticipated games using ray tracing technology. This should push consumers to upgrade to the latest available Nvidia chips.
Not All Great News, However
Apart from gaming, however, there were significant weaknesses for Nvidia. For one thing, data center revenue rose just 3% sequentially and is still down double digits from last year. Management sees continued weakness in spending trends from large customers.
And let’s back up for a minute. Nvidia set a really low bar going into this quarter. Sure, they managed to beat guidance, but guidance was atrocious. We’re still looking at huge drops in both data center and gaming revenues from last year. Competition from the likes of AMD (NASDAQ:AMD) is clearly pressuring Nvidia’s prospects.
Going forward, Nvidia posted lower guidance than analysts had expected. Bulls had been hoping for a big gaming turnaround this quarter and that leading to forward momentum going forward.
Gaming turned up, but not enough to lift Nvidia’s overall prospects. Without things looking a lot better from auto and data centers, NVDA stock will at best chop around if not resume going downward.
Nvidia Faces Serious Headwinds
The elephant in the room remains the trade war. Numerous semiconductor companies have reported that the trade freeze has hit demand. Clearly, it’s put a damper on results for both Nvidia and competition such as AMD and Intel (NASDAQ:INTC) as well. And the trade war appears to be escalating, witness all the concerns about the Yuan slumping earlier this month.
Combine that with more weak guidance from Nvidia, and the outlook for NVDA stock simply isn’t good. You have to suspect that analysts are going to lower their revenue and EPS outlooks for 2020 in the coming weeks now.
Without growth in data center or spectacular results from auto, there’s really not much to get excited about.
The gaming revenues are good. That’s a solid step for NVDA stock. But shares are still trading at more than 8x sales. You’d normally mark a semiconductor company like this closer to 5x sales, which would put NVDA stock down around $90 to $100 per share.
Nvidia investors have priced a whole lot of growth ( along with higher profit margins) from emerging product lines into Nvidia’s stock price. This quarter did little to back up those optimistic assumptions.
Nvidia Stock Verdict
Nvidia has been trading in a narrowing range in recent months. On numerous occasions, Nvidia stock has found support between $130 and $150 per share. On the upside, it made a decent run to try to get back over $200 in April, but each subsequent rally has been weaker and weaker.
Will Nvidia be able to get out of its declining trading range and resume making gains? While this earnings report certainly was a positive, it’s not a game-changer for the firm.
Nvidia stock investors don’t have to worry about the share price plunging to new lows just yet. But don’t expect this earnings rally to be the start of anything much until the trade war is resolved and the company can raise guidance again.
At the time of this writing, Ian Bezek owned INTC stock. You can reach him on Twitter at @irbezek.