Nvidia Corp. is expected to play to its core strengths rather than visionary side hustles this earnings season, as strong gaming and data-center sales overcome deficiencies in self-driving and cryptocurrency-mining.
Nvidia NVDA, +2.07% is scheduled to report second-quarter earnings after the bell on Thursday. In recent quarters, the company has shown huge growth for one of its two relatively new businesses, chips for data-center servers, while still waiting for revenue to flow faster from sales of chips for self-driving cars. The maker of graphics-processing units continues to see big growth in its core gaming sales, but some of those sales have been attributed to purchases by cryptocurrency miners, which are expected to decline.
Still, the main engines of gaming and servers are expected to drive Nvidia over any bumps from waning crypto demand as it waits for more automotive revenue.
Late Monday, Nvidia announced the release of its long-awaited upgrade of its Pascal chip architecture, Turing, which many had expected to be announced after earnings at the Gamescom 2018 expo in Germany.
Analysts on average expect gaming revenue at Nvidia is expected to grow 47% to $1.75 billion from the year-ago period, according to FactSet data, with data-center revenue expected to jump 78% to $740.1 million. Auto-related revenue is forecast to rise 4.2% to $147.9 million.
Recently, Tesla Inc. TSLA, -2.46% announced it was no longer going to use Nvidia chips for self-driving features in its cars, but Chief Executive Jensen Huang said after last quarter’s results that Tesla’s business was not material to Nvidia.
Read: Nvidia CEO says self-driving pause, Tesla Model 3 issues did not affect auto business
“While disappointing for Nvidia, we believe this represents less than $50 million of annual revenue and won’t be replaced until 2019," Susquehanna Financial analyst Christopher Rolland said of the Tesla announcement in a recent note. Rolland has a neutral rating and a $250 price target on Nvidia.
On the other hand, Daimler AG DAI, -2.00% and auto-parts giant Bosch Ltd. BSWQY, +0.00% said they would use Nvidia’s Pegasus AI chipset to power a fleet of Level 4 and Level 5 — with the latter meaning fully autonomous — robotaxis by “early next decade.”
Data-visualization revenue is estimated to rise 8.7% to $255.4 million, while PC and mobile OEM revenue is expected to fall 26% to $185.2 million.
What to expectEarnings: Of the 25 analysts surveyed by FactSet, Nvidia on average is expected to post GAAP earnings of $1.67 a share, up from $1.47 a share expected at the beginning of the quarter. On an adjusted basis after accounting for stock-based compensation, analysts on average expect earnings of $1.85 a share, according to FactSet. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for adjusted earnings of $1.93 a share.
Revenue: Wall Street expects revenue of $3.1 billion from Nvidia, according to 31 analysts polled by FactSet. That’s up from the $2.94 billion forecast at the beginning of the quarter. Nvidia predicted revenue of $3.04 billion to $3.16 billion. Estimize expects revenue of $3.2 billion.
Stock movement: Nvidia shares backed off their then-record high of $260.13 right after its last earnings report, where the company blew past Wall Street estimates and offered a strong outlook. Shares have gained 0.5% since then through Tuesday, even after touching a record high of $269.20 in mid-June.
The PHLX Semiconductor Index SOX, -0.19% has inched up 0.1% since Advanced Micro Devices Inc. AMD, +1.47% kicked chip-maker earnings into gear this season with strong results. In comparison the S&P 500 index SPX, +0.64% has declined 0.2% over that period.
What analysts are saying: Of the 39 analysts who cover Nvidia, 23 have buy or overweight ratings, 14 have hold ratings and two have sell or underweight ratings, with an average price target of $281.05, or 7.5% above Tuesday’s close of $261.43.
As with last quarter, Nvidia is expected to follow Intel Corp.’s INTC, -0.68% lead when it comes to data-center sales momentum. While Intel’s data-center revenue fell just shy of Wall Street consensus in its most recent earnings report, sales also grew 27% from the year-ago quarter.
Susquehanna’s Rolland said that Nvidia data-center sales should remain strong according to his Asia graphics processing units checks, along with Nvidia’s rise in the supercomputer field, with chips powering about 19% of the world’s top 500 supercomputers.
Evercore analyst C.J. Muse, who has an outperform rating and a $275 price target on Nvidia, also focused on Nvidia’s strengths rather than its footprint in fields like cryptocurrency mining.
“Data Center/AI remains an area of strength, particularly when considering additional benefit of a new gaming cycle favoring Nvidia,” Muse said.
Muse expects to drive strong gaming momentum through the rest of 2018 and 2019, but acknowledged that gaming “is at a slight risk as a result of the upcoming product transition.”
Cowen analyst Matthew Ramsay, who has an outperform rating and a $325 price target on Nvidia, remarked that AMD poses “little true competition” to Nvidia on the GPU side “yet.” The analyst said the Turing release will likely turbocharge gaming sales with a “powerful upgrade cycle.”
“We would note that in the four full quarters after Pascal was released in May 2016, NVIDIA’s gaming GPU business grew an average 46% Y/Y,” Ramsay said, adding that cloud and AI spending shows no signs of slowing down for the rest of the year “with hyperscale customers continuing to demonstrate a near insatiable appetite for AI computing horsepower.”
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