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Morningstar | Cryptocurrency Tailwinds Ebb and Nvidia's 3Q Guidance Fails to Appease Market Expectations

Nvidia reported second-quarter results that modestly exceeded our expectations, thanks to broad-based growth across its four major segments of gaming, data center, professional visualization, and automotive. However, the firm's hot streak of 11 consecutive quarters of beating expectations and guiding higher than estimates was finally snapped, as its third-quarter revenue range fell below consensus estimates. We note the firm recently announced its latest GPU architecture: Turing, along with a brand-new Turing-based RTX GPU for high-end visualization. Furthermore, Nvidia is expected to announce a new set of gaming GPUs next week. While we surmise the new product launches could be partially responsible for the softer guidance (as they will not be available the entire quarter), management did not include any cryptocurrency-related sales in its forward guidance. Shares fell about 5% during after-hours trading as the market has come to expect beat and raises from narrow-moat Nvidia.

We are maintaining our $120 fair value estimate and view shares as grossly overvalued, given our view that the firm's gaudy market opportunities in artificial intelligence and autonomous driving will not be conquered solely by Nvidia, contrary to what current stock levels imply.

Second-quarter sales increased 40% year over year but fell 3% sequentially to $3.1 billion. Gaming sales rose 52% year over year and 5% sequentially to $1.8 billion, fueled by Pascal-based GPUs for desktops. Data center revenue was $760 million, up 83% year over year and 8% sequentially, due to increasing demand from hyperscale cloud vendors for Nvidia's Volta GPUs. Every major hyperscale vendor utilizes Nvidia's GPUs to accelerate the training of AI workloads, while Nvidia has also begun tailoring certain variants of its GPUs for the inferencing portion of AI (deploying the algorithm in the real world). Baked into our valuation assumptions is that Nvidia will continue to dominate training workloads, given the strong parallelism characteristics of GPUs that enable more efficient training on immense data sets. However, inferencing will be a larger and more fragmented market, in our view, that will feature solutions from Intel as well as cloud vendors themselves (that is, Google's tensor processing unit). Gross margins were 63.3% for the quarter, down 120 basis points sequentially due to lower cryptocurrency-related sales. Management expects third-quarter revenue to be at a midpoint of $3.25 billion, plus or minus 2%.

For further insight into our views on the AI and AD prospects for chipmakers, please see our Technology Observers “Accelerator: Rise of the Machine (and Deep) Learning Phenomenon” and “Automotive Chipmakers in the Fast Lane – Destination: High Speed Growth.”