Nvidia (NVDA) reported mixed Q3 2023 financial results after the closing bell on Wednesday as the chip designer continued to discharge excess inventory without much ability to predict when demand will be. China’s weakness can improve. The battered stock rose more than 2% in after-hours trading, but only partially regained its 4.5% drop in regular trading. Revenue fell 17% year-on-year to $5.93 billion, beating expectations of $5.77 billion. Adjusted earnings fell 50% to 58 cents per share, below expectations of 69 cents. Adjusted gross margin of 56.1% is much lower than the 64.5% estimate and the company’s own previous guidance of 65%. On the earnings call, management blamed the loss of $702 million in inventory fees, “largely related to lower data center demand in China, partially offset by gains warranty about 70 million dollars.” Gross margin for the quarter is a big improvement from 45.9% in the fiscal second quarter. The bottom line This wasn’t Nvidia’s cleanest quarter, but that’s to be expected as management is still working to realign inventory with demand expectations — a factor affecting the Gaming segment. play and its professional Visualization. That said, encouragingly, the team expects Games inventory levels to reach normal levels as we head into calendar year 2023. Arguably the most positive from the report is management’s ability to supply replacement chips to Chinese customers in place of the high-performance A100 and H100 designs, which the US government announced this quarter will no longer be allowed to export to China due to national security concerns. While we are impressed with how quickly management was able to resolve export restrictions with the A800, overall demand in China remains weak, as noted in the margin commentary. aggregated above. As such, we do not expect much improvement in the fourth quarter and believe China will be a major swinging factor next year. We wish we could give a better idea of when demand in China could improve, but the reality is that it’s in the hands of the Chinese government, a regime that doesn’t care about the economic impact. economics of the no-Covid policy. While we have a feeling that the demand environment there probably won’t get much worse from here on out, unfortunately, there’s not much to go on for those trying to timing. when everything will change. Fourth-quarter guidance was too low, but it was encouraging to hear management say they expect sequential growth in Data Centers, Gaming, and Automotive. However, Pro Visualization probably won’t change on a sequential basis. With the guidance provided, there won’t be much growth, but it’s a step in the right direction. Taking everything into consideration, expected improvement in profits, expected return to sequential growth in Games, management write down inventory in China and Games inventory expectations will normalize as we move into next year, we tend to have a more positive view of stocks than we have in the past. Shares have rallied 40% in the past month or so since a 52-week low on Oct. 13. But it’s unclear when demand trends will improve significantly. As of the end of Wednesday, the stock is still down 45% year-to-date. As a result, we are maintaining our 2 rating and cutting our Club price target from $220 to $200 per share, reflecting uncertainty in China and the macroeconomic environment. tissue is slowing in the United States, which we reiterated again with Micron Technology the previous Wednesday. “the outlook for the 2023 calendar has weakened.” Guidance Towards the fiscal fourth quarter of 2023, management has forecast the following on a non-GAAP basis. GAAP stands for Generally Accepted Accounting Principles. Revenue of $6 billion (plus/minus 2%) was slightly below the $6.1 billion estimate. Despite expectations of sequential growth in Data Centers, Gaming, and Automotive, inventory reordering efforts are expected to continue to weigh on results. Adjusted gross margin of 66% (plus/minus 50 basis points) is slightly better than the 65.4% that Street is modeling coming soon. While we expect to see adjusted gross margin at an average of 60% in the reported quarter, we are pleased to see that we will enter next year with gross margin is more in line with the mid-to-high 60% range we were familiar with growing before the inventory surplus. The company expects operating expenses of $1.78 billion, other income around $40 million and a tax rate of 9% (plus/minus 1%) and capital expenditures (capex) between $500 million to $550 million. Based on guidance, analysts at Truist wrote in a note Wednesday night that the implied earnings-per-share (EPS) outlook range is 76 to 86 cents, at an average of 81 cents per share. per share is significantly higher than 77 cents. Street is looking to appear in print. Q3 Revenue Segment Data Center revenue grew 31% to $3.83 billion, slightly below consensus of $3.84 billion. In its release, management noted that “year-over-year growth is widespread across US cloud service providers, consumer internet companies, and other verticals.” On a sequential basis, however, growth is held back by weakness in China as US government restrictions affect Nvidia’s ability to sell its flagship A100 and H100 chips into the country. . That said, we were pleased to see management’s note that it could “largely offset” the decline by selling substitutes to China. As a reminder, management previously announced the A800 as an A100 alternative that meets US export requirements. Unfortunately, call management noted that regardless of their ability to supply alternatives, “demand in China is generally still weak” and that is expected to remains the same in the current quarter. Regarding the A800, for anyone concerned that it “goes against the spirit” of what the government intends, as one analyst on the call said, management says that the new chip is hardware limited. compared to software limitation, it’s easier to reprogram/modify . Speaking of the $400 million hardship management previously raised when the restrictions were announced, it seems the team was cautious due to concerns about being able to get the chip into production in time. Wednesday’s results, however, with total revenue far outstripped the $5.9 billion that management had guided for the previous quarter (before the restrictions were announced and the team put the 400 figure in). million dollars), shows how quickly the team was able to modify the A100 and get the A800 into the hands of Chinese buyers. On the call, management said: “The company has gone to great lengths to address this situation and ensure that our business and our customers are not impacted.” Looking ahead to next year, management was asked on the call if they think Data Centers can grow if US cloud investment costs stay the same or go down. That’s a question every investor is sure to ask, especially with the Micron announcement we detailed earlier. In response, while management did not offer the most definitive answer, the team was quick to remind investors that Nvidia’s Data Center business “is indexed under two fundamental dynamics.” .” First, it’s “general-purpose computers that no longer scale,” a factor the team has pointed to many times before, saying Moore’s Law – the observation that the number of transistors on a microchip has increased double in history every two years – died. and thus, graphics unit-accelerated computing is the best way to tackle growing workloads while saving money and energy. Second, is artificial intelligence (AI) with management commenting that they “are seeing increased demand in some very important areas of AI.” Management notes that these drivers are more important than ever and believes they are the cause behind the strong demand they are currently seeing. While again, that’s encouraging for the long-term growth potential of Nvidia’s Data Center business, it doesn’t directly address concerns in the shorter term. Game revenue fell 51% to $1.57 billion, but better than expectations of $1.33 billion. The results here reflect management’s ongoing efforts to reduce channel inventory by selling to channel partners at below-need levels “to help align channel inventory levels with expectations. current demand as macroeconomic conditions and the Covid-19 lockdown in China continue to weigh on consumer demand.” Regarding our position on inventory adjustments, management commented on the call that it “believes channel inventories are on track to reach normal levels by the time we close Q4.” While the pressure we’re seeing in this segment is likely to persist for a while longer, gaming demand remains strong and speaks to long-term growth potential with management’s comment that “There’s a tremendous amount of energy in the gaming community that we believe will continue to grow.” promote strong fundamentals in the long run. Steam concurrent users just hit a record 30 million, surpassing the previous peak of 28 million in January.” Professional Visualization revenue fell 65% to $200 million, lower consensus estimate of $337 million. Similar to what we’ve seen in-game, results here were negatively impacted due to lower sales to partners in an effort to better regulate inventory. channel inventory against demand expectations These efforts are ongoing.Despite the short-term weakness, management believes the long-term opportunity remains intact driven by AI simulation, work compute-intensive engineering and design Auto sales grew 86% to $251 million, far exceeding the $231 million expected During the call, management commented that the segment is seeing great momentum and on track to be the next multi-billion dollar business OEM & Other revenue was $73 million down 69% year over year, much lower than expected to 140 million dollars. Capital allocation During its fiscal third quarter, Nvidia returned a total of $3.75 billion to shareholders through dividends and buybacks. As of October 30, $8.28 billion remains under the current authorization, which runs through December 2023. (Jim Cramer’s Charitable Trust is a long-term NVDA. See here for a list. full range of stocks.) As a subscriber to the CNBC Investment Club with Jim Cramer, you will receive trading alerts before Jim makes a trade. Jim waits 45 minutes after sending the trading notice before buying or selling shares in his charity’s portfolio. If Jim had talked about a stock on CNBC, he would have waited 72 hours after issuing a trading warning before taking a trade. INFORMATION ABOUT THE ABOVE INVESTMENT CLUB IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, PLUS OUR DISCLAIMER. NO Fiduciary Obligations OR OBLIGATIONS EXIST, OR BE CREATE, BECAUSE OF YOUR RECEIVING ANY INFORMATION PROVIDED IN RELATED TO THE INVESTMENT CLUB. 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The Nvidia Corporation logo is seen during the annual Computex computer show in Taipei, Taiwan May 30, 2017.
Tyrone Siu | Reuters
Nvidia (NVDA) reported mixed Q3 2023 financial results after the closing bell on Wednesday as the chip designer continued to discharge excess inventory without the ability to determine when demand is weak. China can improve. The battered stock rose more than 2% in after-hours trading, but only partially regained its 4.5% drop in regular trading.