Despite Near Term Inventory Headwinds, Nvidia’s Outlook Looks Bright

by Trefis Team
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Nvidia (NASDAQ:NVDA) is seeing solid growth in its GPUs segment of late, led by higher demand for its GeForce gaming GPUs. However, there has been a significant decline in sales of cryptocurrency-specific products, and there is still excess inventory in the system for these products. This could weigh on the company’s overall performance over the next couple of quarters. In fact, the company lowered its revenue guidance for Q4 FY ’19. This led to a sharp sell off in the stock, and it has declined more than 25% since its earnings release. While the inventory issues could impact the near term growth, we remain positive on the company’s earnings growth in the coming years. Nvidia has been a pioneer in introducing new advancements and catering to the high-end GPU market, and this should continue to drive Nvidia’s earnings growth. We have created an interactive dashboard analysis ~ What Is The Near Term Outlook For Nvidia ~ on the company’s expected performance in fiscal 2019 and 2020. You can adjust the revenue and margin drivers to see the impact on the company’s overall earnings, and price estimate.

Expect GPUs To Lead Near Term Earnings Growth

We forecast the GPU segment revenues to be north of $12.5 billion by the end of fiscal 2020. This can primarily be attributed to growth in its GeForce gaming GPUs, which has seen a 40% surge in sales in the nine months period ending October 2018. The company is also seeing strong sales for its Max-Q based notebooks. Also, Nvidia’s foray into data centers, expanding in both High Performance Computing (HPC) and the cloud, is aiding the segment growth. The data center revenues were up a solid 70% in the nine month period ending October 2018, primarily led by an increased acceptance of its Volta architecture. While we expect these trends to continue in the near term, the segment’s overall performance will likely be impacted by the crypto hangover. GPUs used for crypto mining impacted the PC OEM (original equipment manufacturer) revenues, which were down 40% in Q3 FY19.  The company’s management in its recent earnings conference call stated that it will take another one or two quarters to clear the crypto related inventory.

Tegra Processors Sales Will Likely Grow In Low Double Digits In The Coming Years

Looking at the Tegra Processors, revenues have grown sharply in the recent years, and we forecast it to grow in low teens for the full year fiscal 2019, and in low double digits in the subsequent years. This can be attributed to growth in its automotive business, as well as SOC (system on a chip) modules for gaming consoles, primarily Nintendo Switch. The gaming console in particular has been a massive hit and has sold around 23 million units since its launch. However, Q3 FY19 revenues were down in low single digits due to seasonal dip in SOC modules sales. While this trend could continue in Q4 as well, we expect the sales to pick up in the subsequent quarters. In addition, the company’s automotive division has been doing well of late, and growing in low double digits. The company also announced that Volvo has selected Nvidia’s Drive AGX for its lineup slated for early 2020s. The company’s automotive platforms remain on a sharp upward trajectory with AI (artificial intelligence) to be introduced in several vehicle lineups.

Overall, we expect the GPUs to drive the company’s near term as well as long term growth. However, we expect inventory issues to weigh on the company’s performance over the next couple of quarters. We currently forecast earnings of $7.05 per share in fiscal 2019, and a price to earnings multiple of 29x by the end of fiscal 2019, to arrive at our price estimate of $203 for Nvidia. Note that Nvidia’s stock has declined by more than 35% over the past month, following the weak Q3 numbers and guidance from some of the tech stocks, including Nvidia’s, and the market’s reaction to the tariffs and crypto hangover. We believe that the stock price offers an upside potential of over 30%.


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