NVIDIA Corporation (NASDAQ:NVDA) may not get quite as much attention as an Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), or Tesla (NASDAQ:TSLA), but it is a hugely important company for our digital age.
NVIDIA essentially invented the graphics processing unit (GPU), which are semiconductors that enable graphics to show on computers, mobile devices, workstations, or any other electronic device.
As the first mover in a critical space, NVIDIA has been highly successful throughout the years. It was founded in 1993 and went public in 1999 at $12 a share. It trades at about $166 today, which is 52% below its all-time highs from just last November.
Semiconductor stocks have struggled this year due to supply-chain disruptions, inflation, and investors turning cautious on high-growth stocks at a time when interest rates are rising. Intel (NASDAQ:INTC), the world’s largest semiconductor company, reported horrible earnings that missed estimates while management also lowered guidance.
I like NVIDIA, so I was particularly interested in its quarterly results, which came out after the market closed on Wednesday. Intel fell nearly 9% after its earnings report, while NVDA rose 4% yesterday. (A big up day in the market helped.)
Wall Street obviously liked the report. Here’s my take…
First, some important context. Earlier this month, NVIDIA warned Wall Street that a slowdown in gaming and PC sales would weigh on its results. In turn, the analyst community slashed estimates. The consensus estimate called for adjusted earnings of $0.53 per share on $6.7 billion in revenue.
In Wednesday’s final results, Nvidia reported adjusted earnings of $0.51 per share and revenue of $6.7 billion, so a miss on earnings and in line on revenue. That compared to earnings of $1.04 per share and revenue of $6.51 billion in the second quarter of fiscal year 2021.
Gaming sales slipped 33% year-over-year to $2.04 billion, compared to $3.62 billion in the same quarter a year ago. One bright spot was a 61% jump in data center revenue ($3.81 billion), which was in sharp contrast to Intel’s 16% drop in its data center and artificial intelligence segment. Another bright spot was NVIDIA’s 45% increase in automotive revenue ($220 million).
Company management reassured investors: “We are navigating our supply chain transitions in a challenging macro environment, and we will get through this.”
NVIDIA also noted that it returned $3.44 billion to shareholders in the second quarter in the form of stock buybacks and dividends. That’s up significantly from $2.1 billion in the first quarter.
Some analysts lowered their price targets after NVIDIA’s report, and there is no doubt that things are bumpy in the semiconductor industry right now. The post-earnings pop was more likely a case of “not as bad as expected.”
At the moment, I view NVIDIA as a solid hold. Sales growth and return on equity remain very strong, but they are offset to some degree by a lack of earnings momentum and negative analyst revisions. Neither of those are surprising in the current environment.
I do expect the industry to rebound in the long run. The Semiconductor Industry Association noted that in 1990 U.S. producers accounted for 37% of the world’s semiconductor manufacturing capacity, while today that figure has dropped to 12%. Meanwhile, East Asia now has 75% of the world’s chip manufacturing capacity.
That is changing, as private companies are allocating huge investments in building out production capacity and the U.S. government is taking steps to address the country’s erosion of leadership in this sector. The Chips and Science Act, signed into law earlier this month, provides $52 billion to incentivize companies to start manufacturing their chips in the United States.
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The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
NVIDIA Corporation (NVDA)
