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NVIDIA - revenue falls for second quarter in a row

NVIDIA's third quarter revenue of $5.9bn was down 17% on the same period last year.

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NVIDIA's third quarter revenue of $5.9bn was down 17% on the same period last year. Weak demand in China was in some part driven by U.S export bans on certain products.

The biggest falls in revenue were Gaming and Professional Visualisation. However, Data Centre sales and Automotive both saw growth of 31% and 86% respectively. Data Centre sales have now been the biggest revenue contributor for three quarters in a row. Despite the declines, overall revenue was marginally above analyst expectations.

Underlying gross margins were 56.1%,down from 67.0% and there was also a 30% increase in operating expenses. Operating profit more than halved to $1.5bn, and underlying earnings per share were significantly behind the market's expectations.

There was a free cash outflow of $156m versus an inflow of $1.28bn last year. This was in part driven by a £563m increase in inventories over the quarter, which at $4.5bn was 71% higher than the last year end. Net cash fell to $2.2bn from $10.3bn.

Shareholder distributions totalled $3.75bn. That's $9.29bn year to date.

In the fourth quarter, NVIDIA expects revenue to be within 2% of $6bn. Underlying gross margins are expected to be within half a percentage point of 66%. Operating expenses are expected to total about $1.8bn.

The shares rose 2.2% in after-hours trading.

View the latest NVIDIA share price and how to deal

Our view

NVIDIA makes super fast computer chips. It has deep roots in the gaming industry, with over 200 million gamers and developers using its GeForce Graphics Processing Units (GPU). In terms of 'discrete' or standalone GPUs NVIDIA is still very much the market leader. Unfortunately for NVIDIA, gaming growth has slowed.

That made the last two quarters incredibly challenging. Difficult economic conditions, especially in China, means NVIDIA's customers are spending less on gaming. Export bans on certain products to China have added to the pain. NVIDIA continues to innovate in the space, and new product launches have been well received. Whether that's enough to stem recent sharp declines in gaming revenue remains to be seen.

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 world of intelligent vehicles and self-driving cars, where its worked with the likes of Volvo, Jaguar Land Rover, and Mercedes Benz. This part of the business is growing quickly.

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.

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

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.

NVIDIA is expecting a strong recovery in gross margins in the fourth quarter. However, we think that the recent ramp up in inventories casts a shadow over NVIDIA's ability to bring margins back to the impressive levels we have seen previously.

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. Cash generation has deteriorated throughout 2022, and any hiccup in shifting NVIDIA's high stock levels, could see this trend continue.

NVIDIA is at the cutting edge of some pioneering industries. The price to earnings ratio has crept back above the long-term average reflecting the 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.

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
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 17th November 2022