Tough Quarter for Nvidia, Shares Pricey

NVIDIA NVDA reported fourth-quarter results consistent with the lowered guidance it gave Jan. 28. Excess GPU channel inventories related to the fallout of cryptocurrency-mining GPU demand had already caused fourth-quarter guidance to be significantly lower than expectations when the firm reported third-quarter results in November. Nvidia was also plagued by weaker economic conditions in China and consumers delaying their purchase of the high-end RTX GPUs while waiting for lower price points and more games that can actually utilize ray-tracing and other features enabled by the RTX platform. Nvidia alleviated the price point issue with the recent launch of the RTX 2060 ($349), while popular PC games Battlefield V and Metro Exodus will now be able to take advantage of the key features of Nvidia’s Turing architecture. Cloud demand for GPUs has also decelerated because of broader economic uncertainties. On the basis of these assorted headwinds, fiscal 2020 revenue is expected to be flat to slightly down. We are maintaining our $120 fair value estimate for narrow-moat Nvidia and would recommend seeking a wider margin of safety before committing capital to this GPU titan.

Fourth-quarter sales declined 24% year over year and 31% sequentially to $2.2 billion. Gaming sales fell 46% sequentially to $954 million, primarily due to the aforementioned inventory issues. CFO Colette Kress noted the firm’s normalized quarterly gaming revenue run rate is about $1.4 billion and the first quarter will be the bottom, which implies full-year gaming sales being down at least modestly. Data center revenue was $679 million, down 14% sequentially, and we anticipate near-term challenges in this segment. GAAP gross margins were 54.7% for the quarter, down 570 basis points sequentially due to lower GPU volume and write-downs for components such as DRAM.

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