NVIDIA Will Announce Earnings Results Tomorrow And Here’s What To Expect (NASDAQ: NVDA)

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NVIDIA (NASDAQ:NVDA) stock has soared in the last few days as all eyes turn to the company ahead of its earnings release tomorrow. Sales have fallen in the last four quarters and despite that $NVDA is up 60% in the last 6 months.

Key facts to remember:

• Wall Street consensus is looking for earnings of $1.66 cents per share and $2.96 billion in revenue
• Will the data center segment finally break out of its holding pattern?
• Expect to hear an update on the $7 billion dollar Mellanox acquisition
• Analysts are looking for somewhere around $2.84 billion in guidance for Q1-2020

NVIDIA breaks out its major segments as such: Gaming, Professional Visualization, Data Center, Auto, and finally OEM & Other. In a moment I'll dive into some of the trends seen in each but the overall message is fairly simple: gaming rules the roost at this chipmaker and it's important that it shows some growth in its other divisions, especially data center which contains the nebulous "AI" field.

Gaming, first and foremost

The world's leader in cutting edge graphics and parallel processors is hoping to show a few important things to its investors, chief of which is the state of its core gaming business. Both Intel (NASDAQ:INTC) and AMD posted very healthy Q4 numbers, which suggests the PC market as-a-whole outpaced growth estimates and naturally NVIDIA would be expected to follow suit given it boasts ~80% GPU market share.

And gaming is certainly where NVIDIA's core still remains despite all of its ventures in self-driving systems, AI and enterprise chips, and professional visualization cards. The segment could also be named its "Geforce" division as that name is perhaps the most recognizable brand in all of computer gaming, much to AMD's (NASDAQ:AMD) chagrin.

Despite $700 million from the data center and another $600 million in quarterly revenue from auto and visualization products, gaming still accounts for 55% of the company's total sales as of its most recent earnings release.

The story in gaming begins a year ago, in Q4 2018 (NVIDIA's Q4 FY2019) when the division saw its revenue absolutely plummet quarter-over-quarter by 45%.

Now the answer about what happened in Q4 2018 is pretty succinct. In CEO Jensen Huang's own words:

This was a turbulent close to what had been a great year. The combination of post-crypto excess channel inventory and recent deteriorating end-market conditions drove a disappointing quarter.

The pricing support needed to make mining cryptocurrencies financially feasible evaporated which left excess inventory in the channel prompting a price cut, and then, of course, the secondary market was absolutely flooded with cheap used graphics cards that miners were flocking to liquidate. And indeed through the year, we've witnessed a strong comeback for the Gaming division.

In Q2 the division has posted a respectable recovery and Q3 saw Gaming post revenue of $1.66 billion. Analysts will be looking for revenue in the range of $1.6 to $1.75 billion here. There might be some decline here seasonally, but given what we know about NVIDIA's market share, and the surprisingly healthy PC market, expect good things here.

NVIDIA data center and its $7 billion acquisition of Mellanox

While Gaming went on a nice run throughout 2019, NVIDIA's data center group, its second-biggest division, has seen somewhat less consistent performance over the last several quarters.

As one can quickly see in the above chart, the data center group seems to bounce in between $600 and somewhere in the $700 million range.

Much as been made of the huge push in advanced fields such as machine learning and artificial intelligence, and NVIDIA has a huge slice of these fields with its CUDA architecture used to build the software that many of these advances fields rely on.

Since we can count on a resurgent gaming division due to the overall strength in the PC market, the biggest question here is the data center. Should NVIDIA break out of its holding pattern and deliver revenue north of $800 million it would prove that it can grow in a field that has been fairly stagnant (for NVIDIA) for the past couple of years.

Jensen gave some interesting color commentary during his call with investors last quarter:

This quarter, we have laid the foundation for where AI will ultimately make the greatest impact. We extended our reach beyond the cloud, to the edge, where GPU-accelerated 5G, AI and IoT will revolutionize the world’s largest industries. We see strong data center growth ahead, driven by the rise of conversational AI and inference.

Of course, everyone knows that conversational AI has exploded - every smartphone and connected device found around the home and even vehicles have some kind of voice recognition. So just taking the CEO's comments alone, data center should be growing well here and anything less will be a cause of concern among analysts.

The final note on data centers - what is the status of NVIDIA's splashy purchase of Mellanox for $6.9 billion? Its the largest acquisition NVIDIA has ever made, and Mellanox had serious interest from CPU-maker Intel as well which tells us there is some serious value in this company. Just how will NVIDIA leverage Mellanox's technology to help drive its data center business?

We do know that regulatory hurdles have stalled the deal, so outside of these delays, those of us outside NVIDIA's upper management are more or less in the dark, so its possible we could learn more on the earnings call.

NVIDIA: What analysts are saying

There's been fairly bullish sentiment for NVIDIA for a while now, however, in recent weeks analysts have swung even more bullish than usual. We've seen several upgrades in the last week alone, just before the big year-end earnings announcement. Currently, 80% of analysts are saying good things about NVIDIA stock.

Christopher Rolland at Susquehanna Financial Group lifted his price target to $310 from $285 while maintaining a Positive rating for NVIDIA and Jefferies analyst Mark Lipacis went so far as moving his price target from $255 to high of $315.

Some analysts like Ross Seymore at Deutsche Bank believe that while NVIDIA should do well, most of the "goodness" is already baked into the price of the stock which is currently at its 52-week high.

Things to look out for tomorrow

1. The Coronavirus - just how does NVIDIA management see the virus affecting supply chain activities and channel sales in China and further abroad? Hopefully we get some idea of how much this will affect operations.
2. As discussed above, NVIDIA's data center performance and any commentary on large customer wins. If NVIDIA shows revenue >$825 million in the data center then count it as a huge "W" for Huang and company.
3. Gaming - can NVIDIA show that its Geforce division can be as profitable post-crypto bust as before? Anything north of $1.7B is looking good.