Nvidia Stock Smashed on Weak Earnings, Turing Woes

Nvidia’s stock was hammered today after it warned on Q4 earnings. The slump has been particularly bad — at this writing, it’s fallen 13.68 percent — because Nvidia’s Q4 2018 already wasn’t going to be as good as analysts were hoping back in Q3. When Nvidia made its Q3 2018 earnings announcement, it declared that the collapse in GPU demand for crypto mining had left it with a glut of Pascal GPUs to sell. As a result, it would not manufacture additional midrange cards in Q4 and would instead focus on moving its existing inventory. This led to Q4 earnings would be lower than what investors might expect.

Now, the company has announced that its Q4 earnings will be well below even adjusted expectations at $2.2B rather than $2.7B. In its note, Nvidia writes:

In Gaming, NVIDIA’s previous fourth-quarter guidance had embedded a sequential decline due to excess mid-range channel inventory following the crypto-currency boom. The reduction in that inventory and its impact on the business have proceeded largely inline with management’s expectations. However, deteriorating macroeconomic conditions, particularly in China, impacted consumer demand for NVIDIA gaming GPUs. In addition, sales of certain high-end GPUs using NVIDIA’s new Turing architecture were lower than expected. These products deliver a revolutionary leap in performance and innovation with real-time ray tracing and AI, but some customers may have delayed their purchase while waiting for lower price points and further demonstrations of RTX technology in actual games.

It’s notable Nvidia would straightforwardly admit that it may have overpriced Turing in the eyes of customers. Typically, the more words a company spends on a topic, the more important that issue is to the overall state of affairs. The implication here is that Turing demand, more than macroeconomic weakness in China, may have impacted GPU sales in the consumer space. While Nvidia suggested it enjoyed a strong Turing launch cycle on its Q3 2018 conference call, it’s possible that the initial surge of pent-up demand wasn’t sustained over the full quarter. It’s also possible, given the size of the Chinese market, that Nvidia’s Turing sales were particularly weak in that space (though one would expect the company to explicitly link weak Turing demand to the Chinese market in particular if this was so).

But Turing demand isn’t the only issue on the table. Nvidia wasn’t able to close several data center deals in Q4 as expected because “customers shifted to a more cautious approach.” The company expects its new revenue to be $2.2B (plus or minus 2 percent) with gross margin slipping from an expected 62.3 percent to 55 percent. Currently, Nvidia’s data center revenue accounts for ~30 percent of its yearly earnings. If there were several major deals the company expected to close this quarter, it could explain a significant percentage of the $500M projection drop.

Nvidia’s overall projected Q4 revenue is nearly 25 percent lower than its Q4 2017 revenue a year earlier.

Is Nvidia in Trouble?

It’s only been a month since I wrote a fairly rosy set of predictions for Nvidia in 2019. News like this doesn’t mean that projection is incorrect, though the company’s Q4 was obviously uglier than I realized at the time. But given that this is a tech site, not an investor-oriented publication, I focus such articles on how a company is performing in terms of technology rather than how the stock might move. Macroeconomic considerations obviously matter, but they aren’t the primary focus.

Technologically speaking, not much has changed for Nvidia in the past 30 days. It still maintains a lock on the high-end GPU market (we’ll have to wait a little while longer to find out if Radeon VII will challenge the RTX 2080 in this space) and its still the overwhelming favorite in HPC, AI, ML, and other professional GPU applications. AMD and Intel both have ambitions in these spaces, but Intel’s GPU won’t even be in-market until 2020. If Turing’s price is weighing on its sales, Nvidia has an option: Cut prices. Trimming price on the RTX 2070 and 2080 would undoubtedly boost sales of these GPUs and ameliorate any sales declines based on cost.

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