After the close on November 14 Nvidia (NVDA) announced fiscal third quarter 2020 quarterly earnings of $1.78 a share, 20 cents a share above the Wall Street consensus. Revenue of $3.10 billion was $92.21 million above projections.
Chip stocks are currently among the hottest performers in the technology sector and the market as a while. Witness the 4.11% gain in shares of Nvidia today, November 18, at the close.
But the company doesn’t seem totally out of the woods. For the third quarter revenue was up 17% from the second quarter, but still down 5% year over year. The company guided to revenue of $2.95 billion for the fourth quarter, which would be down from the third quarter but up from the $2.21 billion in the fourth quarter of fiscal 2019. (In other words a reversal of this just reported quarter in that sequential revenue would be down but year over year revenue would be up.)
In explaining the sequential drop in guidance for the fourth quarter, Nvidia management blamed it on the usual seasonal decline in revenue from the gaming segment of Nvidia’s chip business. Companies that make game players or that put graphics chips into their computers for game playing order chips from Nvidia and competitor Advanced Micro Devices (AMD) ahead of time so they’ll have product in stores for the holiday shopping season. Which means more revenue for Nvidia and AMD in the third quarter and less revenue in the fourth quarter.
That seasonality does show up in Nvidia’s fiscal year 2019 revenue where revenue fell from $3.18 billion in the third quarter to $2.21 billion in the fourth quarter of fiscal 2019. So it is plausible that the company would see seasonally lower revenue from gaming graphics chips in the fourth quarter of fiscal 2020.
The big revenue problem in the company’s data center segment does look to be over, though, based on these numbers. Revenue for the data center business was down 8% year over year but up 11% sequentially. And the revenue from the hyperscale segment, which includes Nvidia’s cutting edge artificial intelligence chips, was p both sequentially and year over year.
This is important news since the reason to own Nvidia at a price to earnings ratio of 56 is the potential for the company’s chips in artificial intelligence. In its conference call Nvidia’s management stressed growth in two parts of the AI market.
First, in what it called real-time conversational AI, which focuses on making it possible for computers to engage in human-like dialog, capture context, and spit out intelligent responses, what Nvidia calls inference. The chips that power this conversational AI have to be massively parallel and able to learn from their interaction with the human world.
Second, in sales from moving AI to the enterprise edge. Using Nvidia chips companies can do real time AI processing at the edge of their networks–where the network interfaces with customers and employees–without having to send the data back to the cloud for processing.Computing at the enterprise age promises to be faster and cheaper for customers. At the Mobile World Congress Nvidia announced a software-defined 5G wireless network solution accelerated by Nvidia processors in collaboration with Ericsson. Some market forecasters say that AI at the intelligence edge will become the largest part of the AI market since it promises to make businesses that use AI just a little bit more convenient and save enterprise customers a significant amount of money.
Those are two of the long-term reasons to own Nvidia and to expect to make money on the investment in the long-term. In the shorter term the transition to smaller but more efficient 7 nanometer chips in fiscal 2021–which means in calendar 2020–would help drive Nvidia margins higher. The company also now expects it purchase of Mellanox to close in calendar 2020. Israel’s Mellanox is a chip design company that specializes in interconnects, the software and hardware that stitch together computer networks at the customer and cloud levels. Nvidia has projected that the acquisition is expected to add to earnings in 2020.
Nvidia has been a volatile stock over the last year. It has recently crawled out of the crater created by the slowdown in data center sales to show a almost 30% gain for 2019. The stock has been a member of my Jubak Picks Portfolio since December 29, 2017 and has ridden those ups and downs to an 8.25% gain as of November 18. As of today, though, in recognition that 2020 looks to be a year of slightly slower economic growth I’m cutting my 12-month target price to $260 from $260.
I anticipate adding it to my long-term 50 Stocks Portfolio this week when I update and rebalance that portfolio.