Nvidia (NASDAQ:NVDA) reported its Q2 earnings last Thursday and the results propelled Nvidia stock to big gains: nearly 15% over the next several days. That rally ran out of steam on Tuesday, though. NVDA closed the day at $167.87 for a 1.7% loss.
Will the recovery continue or will Nvidia stock price drop further?
The Market Loved NVDA Q2 Earnings
Last Thursday, Nvidia reported its Q2 earnings.
Revenue of $2.58 billion was down 17% year-over-year, and adjusted earnings per share of $1.24 were down 36% compared to last year. NVDA issued guidance for Q3, calling for revenue of $2.90 billion plus-or-minus 2% (compared to third-quarter revenue of $3.18 billion last year).
The market reaction was swift. Nvidia stock immediately surged, and shares gained nearly 15% before hitting a wall yesterday.
Lowered Expectations for Nvidia Stock
Of course, the question has to be asked: why were investors so excited about NVDA when the company’s revenue and EPS were both down significantly compared to last year? A big part of that is lowered expectations.
Nvidia and graphics card rival Advanced Micro Devices (NASDAQ:AMD) have both been hit hard in 2019 by the bottom falling out of the crypto currency mining market. And both have been affected by the ongoing trade war with China. Those two factors have reset expectations about NVDA earnings.
The money spent on graphics cards used to “mine” Bitcoin and other crypto currencies was an unexpected boost to Nvidia and AMD last year. At one point in 2018 the industry was generating 10% of NVDA’s total revenue — and when the crypto market tanked, so did Nvidia stock price.
In addition, like many tech companies, Nvidia stock has been caught in the crossfire of the trade war between the U.S. and China.
With these two big factors in play, analysts were expecting lower numbers from NVDA and the company delivered numbers in line with those expectations. Sequentially, there were signs of improvement, with revenue up 16% compared to Q1, while EPS gained 41%. But there was a more to the Nvidia stock rally than that …
Some Positives + Big News for NVDA Stock
Boosting the positive reaction to Nvidia’s earnings were some wins within key segments.
In particular, Nvidia’s Automotive division posted 30% revenue growth compared to last year, hitting quarterly record revenue of $209 million. The Professional Visualization division also saw 4% growth to $291 million. In addition, every one of Nvidia’s divisions posted sequential quarterly revenue growth compared to Q1. Gross margins also saw a quarterly improvement at 60.1% compared to 59% in Q1.
NVDA investors were also reacting to a number of timely events that bode well for the company.
At the Gamescon conference on Monday, Nvidia and Microsoft (NASDAQ:MSFT) announced that ray tracing support will be coming to the PC version of “Minecraft.” Given that “Minecraft” is the best-selling video game in the world (over 176 million copies sold) and only Nvidia’s GeForce RTX graphics cards are capable of real-time ray tracing, this is seen as a big win for the company. At a higher level, a 90-day extension of the reprieve of the U.S. trade ban against Huawei was announced on Monday, and that has been seen as possibly signalling an attempt by the U.S. to cool tensions and the trade war with China.
Yesterday at Gamescon, NVDA announced new drivers for its GeForce RTX cards that it claims will improve frame rates by up to 23% on a number of popular PC games, which would be a huge win. That announcement failed to impress investors – given the 1.7% Nvidia stock drop — but gamers are excited.
In short, Nvidia stock still has room for growth and it has some momentum. The stock is up around 29% since the start of the year, but even after the 15% post-earnings run NVDA still far from the $192 level it hit in April. Given the stream of good news for the company, odds are that Tuesday’s loss was a speed bump.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
