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NVIDIA - third quarter revenues better than expected

Nadeem Umar | 15 November 2019 | A A A
NVIDIA - third quarter revenues better than expected

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NVIDIA Corp USD0.001

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Third quarter revenues were down 5% on last year at $3bn, although this was ahead of ahead of analyst expectations.

However, guidance of fourth quarter revenue within 2% of $2.6bn, was slightly behind what the market had hoped.

A quarterly dividend of $0.16 per share was announced.

The shares were broadly unmoved in afterhours trading.

View the latest NVIDIA share price and how to deal

Our view

NVIDIA has been at the forefront of gaming and graphics technology since its formation in 1993. Gaming still accounts for over half of sales, and industry wide revenues are expected to grow 9.3% a year in the five years to 2021. NVIDIA should be in line for a healthy proportion of that growth.

But the power of NVIDIA's chips mean they are increasingly in demand outside the world of consoles and joysticks.

The 'Professional Visualisation' division supports digital design and engineering work in architecture, oil & gas and medical imaging. Meanwhile NVIDIA's GPUs help provide the processing power behind artificial intelligence and machine learning through the 'Datacentres' business.

It might come as something of a surprise, but NVIDIA also has a stake in the potentially transformative self-driving car market. Its DRIVE platform can "perceive and understand in real-time what's happening around the vehicle...and plan a safe path forward".

If growing end markets is one attraction, the group's neat business model another.

The group outsources all of its manufacturing and without the costs, capital and risk associated with owning manufacturing facilities, NVIDIA's delivered impressive gross margins. This helps fund M&A, like the $6.9bn acquisition of Mellanox, which should boost data centre architecture for high performance computing and AI.

High gross margins also help fund the $2.4bn research & development budget. Recent innovations have included real time ray tracing, which could revolutionise gaming graphics with ultra-realistic imagery.

With net cash on the balance sheet and hefty operating cash flows, it's difficult to see NVIDIA as anything other than a very high quality business. Unusually for a US tech company, the group's willing to return surplus cash to shareholders - some $1.95bn last year. That's mostly through share buyback's, although these are on hold until the Mellanox acquisition's done and dusted. There's currently a 0.3% prospective dividend yield on offer too.

The group's strengths are reflected in a rating of 30.6 times expected earnings. Investors should also bear in mind that in such rapidly changing industries, winds change swiftly.

For example, NVIDIA benefitted from a massive surge in demand from cryptocurrency miners in 2017 and 2018 - totalling around $579m of sales. That's since dried up, making for some tough comparisons. Going forward, the group says business levels are normalising, but we'd not rule out further ups and downs from here.

Longer-term however, it's hard not to be impressed by a business at the cutting edge of some pioneering industries.

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Third quarter results

Gross margins fell to 64.1%, compared to 61% at the same point last year. However, a 6% increase in operating expenses to $774m, combined with lower revenues, meant net income fell 4% to $1.1bn, versus the prior year.

The Gaming business saw revenue fall 6% to $1.7bn over the year, reflecting lower sales of GeForce desktop Graphic Processing Units (GPUs) overall. However, the decline wasn't as bad as analysts expected. Compared to last quarter, revenues were up 26%.

Trends were similar in the Data Centres business, where revenue of $726m was down 8% year-on-year. That came from lower enterprise revenue due to a different mix of products, including lower DGX(TM) sales. This was partially offset by an increase in hyperscale customer demand. The Automotive business saw revenue dip 6%, while Pro Visualisation recorded a 6% increase reflecting strength in mobile workstation products.

Free cash flow was $1.5bn, compared with $337m at the same time last year.

The group expects gross margins of around 64.5% next quarter, and operating expenses of $805m.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.