While chipmaker NVIDIA’s [NVDA] share price is up 13% in the year to 9 August, it has seen its earnings and revenues tumble in recent quarters. And there are fresh challenges to face in the coming months, after Trump announced plans to reignite the US-China trade war in early August.
How did Nvidia perform last quarter?
After its Q1 results on 16 May and reporting better-than-expected earnings, Nvidia shares saw a brief pop. Revenue came in at $2.22bn versus the $2.20bn expected by analysts, and earnings were $0.88 per share against the $0.81 expected.
Despite this, there were some troublesome numbers in its report that showed revenue had declined 31% year-over-year (YoY), marking its second quarterly decline in a row. Meanwhile, the company’s profits fell by as much as 68% to $394m.
Earlier in the year, Nvidia’s CEO Jensen Huang explained that the slump is largely down to weakening economic conditions in China, and the disappearance in demand from cryptocurrency miners when the market crashed last year. He suggested that this is a short-term slump, however as trade tensions between the US and China show little sign of abating, it looks like this might prove a longer-term problem.
Is a positive outlook in sight?
Analysts expect earnings per share will be down by 41% year-over-year from Q2 2019. Meanwhile, revenues are expected to come in 18.5% down from last year – a smaller gap YoY than Nvidia achieved in Q1. When the company reported a similar slump for its last quarterly earnings in May, shares declined around 5% over the four days following the news.
|PE ratio (TTM)||29.10|
|Quarterly Revenue Growth (YoY)||-30.80%|
Nvidia share price vitals, Yahoo Finance, 12 August 2019
Where do the opportunities lie?
The company is confident its slump is short-term and that growth in cloud computing and AI technology will boost its business over the long-term. In a bid to increase its competitiveness in the space, the chipmaker acquired Mellanox Technologies Ltd [MLNX] this year for $6.9bn.
Despite increasing competition from Advanced Micro Devices [AMD], Nvidia controlled 77.3% of the GPU market in the first quarter of 2019 while AMD had 22.7%, according to research firm JPR.
Is Nvidia a ‘buy’?
Nvidia, along with the shares of other chipmakers including Advanced Micro Devices, Broadcom [AVGO], Intel [INTC] and Micron [MU], have all struggled since Trump threatened to impose a 10% tariff on an additional $300bn of Chinese goods on 1 August.
The move suggests that Nvidia will be on a downward trend in the lead up to its results on 15 August. Since Trump’s threat, Nvidia’s stock has fallen by 7%.
Bernstein analyst Stacy Rasgon said Nvidia’s shares aren’t attractive at the moment, and that there will be better entry points in the future.
“While the stock has pulled in somewhat recently on trade/tariff/geopolitical fears, the shares still aren’t cheap,” he said. “We remain somewhat cautious into the print nonetheless, and believe better entry points may exist at later dates.”
Rasgon highlights that the company’s stock is trading at 22 times the next 12 months’ estimates. He currently holds a ‘perform’ rating on the stock and has reiterated his $150 price target for Nvidia shares.
“While the stock has pulled in somewhat recently on trade/tariff/geopolitical fears, the shares still aren’t cheap. We remain somewhat cautious into the print nonetheless, and believe better entry points may exist at later dates” - Bernstein analyst Stacy Rasgon
Despite dampened optimism, the consensus recommendation for Nvidia is ‘buy’, according to Nasdaq. Firms making recommendation on the stock include Jefferies, Oppenheimer and Piper Jaffray.