by Clement Thibault
NVIDIA Corporation (NASDAQ:NVDA), a global visual computing company, reports results for Q2 '17 on Thursday August 11, after the closing bell.
1. Earnings and Revenue Forecast
The Wall Street consensus on NVDA is $0.37 EPS, on $1.35B revenue. In Q2 '16, Nvidia reported an EPS of $0.34 on $1.15B. Meeting expectations would mean a growth rate of 17% and 8% on the top and bottom line, respectively. In the past two quarters, the company posted growth of 13% and 12% in revenue. Putting the numbers in perspective, this means that not only do analysts expect Nvidia to keep growing, they also expect it to step up its growth pace. Will it?
2. Gaming Graphics Cards
Graphics cards for gaming are Nvidia's core business. Currently this segment is responsible for over 50% of NVDA's revenue ($687M out of $1.3B as of last quarter, to be precise). For this reason, it's been a very interesting quarter; Both Nvidia and its bitter rival Advanced Micro Devices (NASDAQ:AMD) each launched their new, top-of-the-line graphics card. Nvidia introduced the GTX 1080 on May 27th. AMD unveiled the RX480 on June 29th.
The prevailing sentiment says each company opted to focus on different demographics for their new release. Nvidia, creator of the higher performing and more expensive card—it retails for around $650—is aiming for hardcore gamers who simply aren't willing to compromise on performance. On the other hand, AMD's offering is aimed at the average consumer with a product that is probably the best value for money with its top graphics card costing about $220. Both cards sold extremely well when they were launched and each was also out of stock for quite a while. Both cards offer new technology and significant performance upgrades, and it is likely that these new cards will strongly contribute to the top and bottom lines of both Nvidia and AMD. It's worth noting that because the cards were launched mid-quarter, during today's report we'll only see the early effects of the releases, and the rivalry.
3 Datacenter
The standout in last quarter's report, this segment grew by 62% annually. This is the division that develops and produces Nvidia's very high performance GPUs which are used by professionals to compute intensive portions of applications, by unloading to the GPU from the CPU, thereby allowing much faster calculation and results.
This GPU is especially suited to scientific applications as well as for heavy algorithm calculation which applies to artificial intelligence and machine learning. While the new Nvidia GP100 GPU isn't widely distributed yet, it has been made available to select customers such as Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB), whose spending on the new product generated the impressive growth seen last quarter. The rest of the world will be able to buy it in Q4. A commercial success would propel the company and the stock to as yet unattained highs.
Of course, chipmaker Intel (NASDAQ:INTC) is planning to fight back with a new powerful computing chip, and it remains to seen how these rival computing devices will fare against each other. Though GPUs were once used only to power 3D rendering, lately they've begun to also be used to accelerate any computing heavy task, thereby threatening Intel's core business. As the competition ramps up, it remains to be seen whose product will do the heavy lifting best.
4. Automobiles
The automobile segment is yet another fast growing division for Nvidia, which so far is leading the field in terms of technology for autonomous vehicles, more commonly called self-driving cars. Growth has been extraordinary there too, with a 46% increase in revenue year-over-year. Industry scuttlebutt says NVDA's leading supercomputer for cars, Drive PX2, is currently being tested by multiple car makers including Volvo, Honda, Tesla and Ford. Each automaker has promised to release a completely autonomous car by 2020. As the auto industry continues to push for driverless cars, Nvidia will continue to profit from this segment as well.
5. OEM and IP
Of all the segments on which Nvidia reports, this is the only one seeing a steep decline. OEM stands for "Original Equipment Manufacturer" and IP is Intellectual Property. Revenue brought in via this segment, $173M for Q1, is down by 20% since last year. A $66M cross-licensing agreement with Intel to manufacture semiconductor technology, as well as multiple partnerships with PC makers such as IBM, Dell and HP are the revenue drivers here. Nvidia's CEO Jen-Hsun Huang expects that the segment's revenue will stabilize, although it isn't necessarily bad for Nvidia to concentrate on its higher margin, faster growing segments instead. Though it's not entirely clear, but overall it seems that weak PC sales and less focus by Nvidia on OEM chips such as the Tegra line account for the slippage. Weak PC sales have no affect on the graphic card segment because the graphic card segment is specialized and unique. And of course, PCs are still the only way for gamers to get graphics so they wouldn't be a factor in the weakening PC sales.
Conclusion
One thing we haven’t mentioned in this analysis is Nvidia's profitability. Its operating income in Q1 was $245M, compared to $176M the previous year, for growth of 39%. For investors considering buying the stock now, unfortunately it has already made a huge jump forward over the past year, rising from $20.11 on August 1, 2015 to about $59.00 at yesterday's close. That's almost 200% in one year.
In our opinion, Nvidia's stock is probably one of the best boom-or-bust equities on the market right now. The potential for its GPUs – as components in cars, supercomputers, and everything 'smart' – is unparalleled in today's technology sector. While car makers are given credit for having the vision to bring self-driving cars to market, Nvidia is the workhorse powering the dream.
A single company can rarely operate alone within a profitable market, and Intel's new series of processors will take aim squarely at Nvidia. Nevertheless, and even though the company is currently trading at a P/E ratio above 50, Nvidia is one of the few expensive companies we believe is positioned to benefit from technological advances and computing needs over the long term.