NVIDIA fourth quarter should show it is still in the game

Chipmaker’s prospects still looking up

Despite lacerations during the recent stock market rout we still think the chips can stay up for NVIDIA. The graphics card maker is scheduled to report fourth-quarter (Q4) earnings after the U.S. market close on Thursday. Our view remains that the leading position its key manufacturing segments occupy— gaming, cryptocurrency mining, datacentres and cars—should lead to further gross margin expansion after Q3’s 50 basis points rise to 59.7%, above guidance. Wall St’s forecasts currently notch this key earnings measure at 59.73% for the year, though 59.49% in Q4 on a GAAP basis. If we’re right, and gross margin views are conservative, the stock could easily recoup a decline of some 1%-2% in line with the market at the time of writing.

Card marked?

To be sure, there are questions around whether NVIDIA shares, that have skyrocketed 750% over two years, including 90% over the last year, can sustain that pace. A solid quarterly report will be essential for the shares to avoid swift and sharp punishment, particular as investors are now highly sensitized to questions around over valuation and as we have seen, are no longer reluctant to act.

Datacenters are key

We see focus homing in on specific NVIDIA segments. For one, the core video gaming business, were revenues are widely seen rising to $1.58bn billion, up about 17.3% from the year before. With 25.8% growth for gaming in Q3 however, a much lower rise than that could hurt the shares. For the smaller automotive division, revenues of $150m are foreseen, up 12.2%. NVIDIA’s Q3 auto segment revenues were $144m, up 13.4%, pointing to acceleration by the car business. Making datacenter components is perhaps NVIDIA’s most important business after graphics chips and has been the $140bn group’s fastest growing segment. Datacenter revenues zoomed up 109% to around $500m in Q3. Company guidance and the group’s position in the market suggest Datacenter revenues could yet go higher in Q4, with a figure around $550m doing the rounds on Wall Street. If seen it would be an 85.5% improvement on the year.

The expectations game

All told, NVIDIA is, like many a tech sector star before it, now captive to the expectations game. Market reactions are difficult to predict, but generally, any hint of a slackening off of prior fantastic growth rates could be a negative for NVIDIA shares, even if the group is solidly run and continues to grow strongly.

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