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NVIDIA - Third quarter outlook disappoints, gaming challenging

NVIDIA'S second quarter revenue and earnings were lower than the market expected...

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NVIDIA's second quarter revenue and earnings were lower than the market expected, with revenue lower than guidance issued in May. The miss reflects lower sales from gaming products, which are facing ''challenging market conditions''.

Revenue rose 3% to $6.7bn, while operating profit fell 57% to $1.3bn.

Third quarter revenue is expected to be within 2% of $5.9bn, with the sequential decline led by Gaming and Professional Visualization.

The shares fell 4.6% in after-hours trading.

View the latest NVIDIA share price and how to deal

Our view

NVIDIA makes graphics cards (among other things, but more on that later). These are the clever bits of kit that help gaming companies make their games come to life. Unfortunately for NVIDIA, gaming growth has slowed.

That made the last quarter incredibly challenging. The issues are stemming from a couple of sources. The first is well-documented supply chain challenges. The second is perhaps more concerning. Difficult economic conditions, especially in China, means NVIDIA's customers are spending less on gaming.

The group's confident the long-term outlook for gaming is attractive, though, and we're inclined to agree. Sales rates on gaming products are up significantly since before the pandemic. That makes the future look bright, but demand could remain subdued for some time.

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

The group has actively altered its mainstream chips to make them less effective for cryptocurrency mining (which was eating up global supply). The 'Professional Visualization' division supports digital design and engineering work in architecture, oil & gas and medical imaging. Meanwhile the DRIVE platform gives it a stake in the exciting self-driving car market, with a product that can "perceive and understand in real-time what's happening around the vehicle...and plan a safe path forward".

However, it's the Data Centres business which has been top of the pile over the last couple of years, and that's saying something when you consider how well gaming's been doing. As well as powering some of the world's most powerful supercomputers, NVIDIA produces cutting edge hardware for training artificial intelligence (AI) software. It's this AI expertise, enhanced by the $6.9bn acquisition of Mellanox. The adoption of NVIDIA products by some of the world's biggest computer makers should result in some reliability of revenue. That said, there are some challenges in the nearer-term. Major hardware companies, particularly in China, have really reined in investment as economic conditions sour. This should reverse, but the timing and full extent of this is unclear.

NVIDIA outsources all its manufacturing. Avoiding the costs, capital and risk associated with owning manufacturing facilities has generally helped NVIDIA deliver impressive gross margins and cash flow.

High gross margins help fund the research & development budget, which stood at $3.9bn last year. NVIDIA is slowing the rate of operating cost growth as it looks to help protect profits while challenges remain. That's the right move, but it will need monitoring - slashing costs too far risks compromising on the group's commercial position.

There's also net cash on the balance sheet, so unusually for a US tech company, the group's willing to return surplus cash to shareholders, mostly through share buybacks. Remember though returns are variable and not guaranteed.

NVIDIA is at the cutting edge of some pioneering industries. There are long-term growth opportunities. But the exact timeline for when supply and economic conditions improve is hard to predict. Further pressure can't be ruled out.

NVIDIA key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Second Quarter Results

Within Data Center, revenue rose 61% to $3.8bn, which was ''somewhat short'' of management's expectations because of supply chain issues. The overall increase reflects an increase in very large-scale customers, and cloud computing customers. The NVIDIA Grace superchips are being used by big computer makers, including Atos and Dell Technologies. Progress was also partially offset by weaker trading in China, reflecting economic conditions.

Revenue included $287m for orders originally scheduled for delivery next quarter, which have been changed to second quarter delivery with extended payment terms.

Gaming revenue fell 33% to $2.0bn, because of a more challenging economic backdrop. The group has made some changes to prices to address these issues with some partners, as it predicts the tough conditions will last into the third quarter. Nvidia's products are also used for cryptocurrency mining, but it's ''unable to accurately quantify the extent to which reduced cryptocurrency mining contributed to the decline in Gaming demand''.

Lower Desktop revenue fed into a 4% fall in revenue to $496m in Professional Visualization.

Increased demand from self-driving and AI cockpit solutions meant Automotive revenue rose 45% to $220m.

OEM and Other fell 66% to $140m, driven by lower notebook sales, and cryptocurrency mining processor revenue was significantly lower.

Underlying gross margins fell to 45.9% from 66.7%. Total reported expenses rose to $2.4bn from $1.8bn, largely because of increased Research and Development costs.

Free cash flow was $824m, down from $2.5bn last year. NVIDIA had net cash of $6.1bn as at the end of July.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 25th August 2022