Nvidia Earnings Preview – Nov 21, 2023

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Nvidia (NVDA), a leading chipmaker, is set to announce its fiscal third-quarter results, and investors are eagerly awaiting the outcome. Despite recent uncertainties in the AI space, including management turmoil at OpenAI and tightening chip export restrictions by the U.S. government, Nvidia is expected to continue thriving. In this earnings preview, we will delve into the factors that will shape Nvidia’s performance and explore the importance of supply in determining the company’s success.

Strong Performance and Analyst Expectations

Nvidia has been the standout performer among S&P 500 companies, with its stock posting a remarkable yearly gain of over 222%. Analysts maintain a bullish outlook for Nvidia’s Q3 performance, anticipating continued upside potential in its stock. The Street expects Nvidia’s adjusted earnings for Q3 to jump to $3.37 from $0.58 in the prior-year quarter, reflecting the company’s strong growth trajectory. Furthermore, analysts project Nvidia’s revenue to rise by an impressive 173% year-over-year to $16.2 billion.

Analyst Insights and Price Target

Leading analysts are optimistic about Nvidia’s upcoming earnings report. Christopher Rolland, an analyst from Susquehanna, expects Nvidia to have a “beat and raise” quarter. He attributes this expectation to an improved supply chain and an impressive backlog, indicating strong demand for Nvidia’s products. Rolland raised his price target for Nvidia to $625 from $600, underscoring his confidence in the company’s performance.

Toshiyari Hari, an analyst from Goldman Sachs, also expects Nvidia to report strong Q3 results and provide encouraging forward guidance. He finds Nvidia’s risk/reward profile attractive at current levels. Hari believes that both Nvidia’s Data Center and Gaming segments have performed well. He projects Q3 Data Center revenue of $12.4 billion, representing a 20% sequential increase, and Gaming revenue to rise by 14% to $2.82 billion.

The average price target of analysts for Nvidia is $648.01, implying a 31.5% upside potential from the current levels. This Strong Buy consensus rating is based on 37 Buy recommendations and one Hold recommendation, indicating Wall Street’s high level of confidence in Nvidia’s performance.

Options Trading Activity and Anticipated Move

Options traders are pricing in a +/- 7.82% move on Nvidia’s earnings, indicating the expected volatility surrounding the company’s financial results. Nvidia shares have averaged a 5.86% upward move in the last eight quarters, with limited reactions to previous earnings reports. The anticipated move is determined by computing the at-the-money straddle of the options closest to the expiration after the earnings announcement.

Importance of Supply in Nvidia’s Success

While Nvidia’s prospects seem promising, supply remains a critical factor that will shape the company’s future performance. Nvidia’s dominant position in the AI space allows it to benefit from developments in generative AI. However, efforts to introduce new products and ease supply chain issues are crucial to meet the growing demand for Nvidia’s offerings.

Nvidia has been proactive in improving its supply chain and increasing capacity at existing suppliers. This strategic approach has helped the company navigate supply constraints and meet customer demand. Nvidia’s ability to ensure a consistent and reliable supply of its products will be crucial for its continued success.

Data Center and Gaming Segments: Key Drivers of Growth

Nvidia’s Data Center and Gaming segments have been significant drivers of its growth. The Data Center segment, in particular, has experienced impressive revenue growth. Analysts project Q3 Data Center revenue to reach $12.4 billion, representing a 20% sequential increase. This growth can be attributed to the high demand for AI-related applications and services across various industries.

The Gaming segment has also performed well, with analysts anticipating a 14% increase in Q3 Gaming revenue to $2.82 billion. The popularity of gaming and the increasing adoption of advanced gaming technologies have contributed to Nvidia’s success in this segment.

Gross Margin and Operating Income

Nvidia’s gross margin has shown significant improvement, reaching 70.1% in the last quarter compared to 64.6% in the previous quarter and 43.5% in the same period last year. This record-high gross margin can be attributed to higher average sales prices and a greater mix of software in Nvidia’s product offerings. The company’s software business alone is worth “hundreds of millions of dollars annually.”

The operating income has also seen substantial growth, with a 1,263% year-over-year increase to $6.8 billion. This growth is a testament to the cyclical nature of the semiconductor industry. Nvidia’s operating margin for the last quarter was 50.3%, significantly higher than the 7.4% reported in the same period last year. Management expects the operating margin to expand further to 53.1% in the upcoming quarter.

Cash Flow and Financial Position

Nvidia boasts impressive cash flow margins, outperforming other mega-cap stocks. The operating cash flow margin stands at 47%, with a free cash flow margin of 44.8%. The company’s ability to generate strong cash flows is supported by higher revenue and $1.25 billion in customer payments received ahead of the invoice date.

Nvidia maintains a healthy financial position, with $16.02 billion in cash and marketable securities and $9.7 billion in debt. The company has also demonstrated its commitment to returning value to shareholders through share repurchases. Last quarter, Nvidia repurchased $3.28 billion worth of shares. The Board of Directors has authorized an additional $25 billion in stock purchases, with $4 billion still remaining at the end of Q2.

Conclusion

As Nvidia prepares to announce its fiscal third-quarter results, the company’s strong performance and optimistic analyst expectations bode well for its future. The importance of supply in meeting growing demand cannot be understated, and Nvidia’s efforts to improve its supply chain and increase capacity at existing suppliers are crucial for its continued success. With strong growth in the Data Center and Gaming segments, impressive gross margins, and robust cash flow, Nvidia is well-positioned to deliver favorable financial results. Investors will closely monitor the earnings report to gain insights into Nvidia’s performance and its ability to maintain its upward trajectory in the market.

Disclosure: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Nasdaq, Inc.