Nvidia Corp. investors are going to have to make a big bet that the company’s forecast is going to pan out after a disappointing finish to 2018.
Nvidia NVDA, +1.08% reported fourth-quarter results that topped lowered expectations Thursday afternoon, thanks to slightly better sales of its graphics-processor chips for use in data centers, a growth market that slowed at the end of last year for most companies. The results didn’t really matter, though, as everyone wanted to know what Nvidia would forecast for this year, when it expects to battle through the “crypto hangover” that has pounded the company’s stock for months.
That forecast came in strong. While Nvidia expects revenue will continue to decline at scary levels for this quarter, it still expects revenue to be flat or only slightly down for the full year. The news sparked a big gain for Nvidia stock in after-hours trading, with shares gaining more than 8% at times during the extended session.
“As we leave the bottom and leave this inventory issue behind us, we’re super well-positioned,” Nvidia Chief Executive Jensen Huang confidently said on Thursday’s conference call. “We have a full stack of RTX, the Turing architecture is fantastic. It is unquestionably the best in the world. We have the best performance of every single price point. And we have great notebooks that the market can now buy. And so I’m looking forward to reporting our status with you guys as the year goes on. It should be a good year.”
While executives sounded hopeful and even intimated that the forecast was perhaps a lowball estimate, analysts did not seem convinced that Nvidia will achieve its full-year goal, because so much relies on strong growth in the second half in gaming.
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Gaming is Nvidia’s specialty, and new gaming cards usually mean a big windfall. But the reception to its new high-end graphics chips based on its Turing architecture has been unexpectedly lackluster. A lack of videogames that can take advantage of the new ray-tracing feature and customers waiting for lower prices added to crypto-mining issues to drive revenue in Nvidia’s gaming business down 45% to $945 million last year.
Investors should have seen a correction in Nvidia’s inventories that would give faith that a rebound was coming, but the report did not provide that. Inventories were much higher than Wall Street was expecting in the quarter, gaining 11% instead of dropping 39%, as analysts expected.
Chief Financial Officer Colette Kress said she expects the higher inventories to be behind them after the first quarter, when she expects “our business to have bottomed.” She said the fourth quarter included $128 million in an inventory write-down, and she did not expect any further write-downs.
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“While this was a challenging quarter in our gaming business, we look forward to putting the channel-inventory correction behind us and building on the solid foundation of our Turing architecture,” Kress told analysts.
The question is, how solid is that foundation? Nvidia still has big potential growth engines in autonomous vehicles and server sales, and it still has a chance for massive growth as those other markets for its GPUs mature.
The biggest factor in Nvidia’s finances, though, is chips sold for gaming, and that business still seems on shaky ground despite the confident forecast and color from executives. Just like all the other chip makers predicting a better second half of this year, Nvidia doesn’t have a crystal-ball view beyond a couple of quarters. Investors have to make a leap of faith.
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