Adjusted EPS and revenues were a beat, but weak outlook for current quarter causes selloff post-call
Nvidia stock drops as China COVID shutdowns weaken outlook
9:11 pm ET May 25, 2022
By Wallace Witkowski, MarketWatch
High end of Nvidia's second-quarter revenue outlook is $8.26 billion, while Street wanted $8.4 billion; gaming revenue expected to pull back
Nvidia Corp. shares fell in the extended session Wednesday after COVID shutdowns in China and the war in Ukraine shaved half a billion dollars off the chip maker's outlook for the current quarter, while the company reported record results.
For the fiscal second, or current, quarter, Nvidia (NVDA) forecast revenue of $7.94 billion to $8.26 billion, while analysts surveyed by FactSet have forecast revenue of $8.4 billion on average. The company said "Russia and the COVID lockdowns in China," were responsible for an expected revenue shortfall of about $500 million in the current quarter.
That's similar to Cisco Systems Inc. (CSCO), which reported its earnings this past week and has an April-ending quarter like Nvidia. Cisco noted that it was broadsided after Chinese authorities locked down Shanghai starting on March 27, which threw a monkey wrench into its ability to get components. As a result, Cisco issued a poor outlook and shares saw their worst day in more than a decade
No sales to Russia constitutes a $100 million revenue shortfall in Nvidia's data-center business, Colette Kress, Nvidia's chief financial officer, told analysts on the conference call.
"We estimate the impact of lower sell-through in Russia and China to affect our Q2 gaming sell-in by $400 million," Kress said on the call, which would be about 11% of Nvidia's current gaming sales.
In the first quarter, gaming sales rose 31% to a record $3.62 billion from $2.76 billion, while analysts surveyed by FactSet had expected Nvidia gaming sales of $3.46 billion. That revenue, however, is expected to pull back in the current quarter, further weakening Nvidia's outlook.
"As we expect ongoing impact, as we prepare for a new architectural transition later in the year, we are projecting gaming revenue to decline sequentially in Q2," Kress said. "Channel inventory has nearly normalized and we expect it to remain around these levels in Q2."
"Now we're having a better equilibrium between the supply that we have available and prices, not perfect yet, but near near normal levels of what we would like to see," Kress told MarketWatch in an interview following the analyst call.
Lately, gaming cards have come down from the astronomical prices that were prevalent last year, when cards were often double their manufacturer's suggest retail price, or MSRP. Compared with Nvidia's RTX 3080 card with an MSRP starting at $699, a quick survey shows 3080 cards priced as low as $810 at Best Buy and $850 at Newegg. It should be noted that Kress confirmed that inventory was built before the China lockdown made sketchy supply chains even worse.
"We still believe our end demand remains very strong," Kress told analysts on the call, adding that gaming revenue is expected to grow on a year-over-year basis. Nvidia reported second-quarter gaming revenue of $3.06 billion in 2021's second quarter.
"But in total, Q2 gaming will decline from last quarter from Q1, that it will probably decline in the teens as we try and work through some of these lockdowns in China which are holding us up," Kress said. "So overall, the demand for gaming is still strong: We still expect end demand to grow year-over-year in Q2."
Nvidia shares fell 7% after hours, following a 5.1% rise in the regular session to close at $169.75.
Meanwhile, Nvidia's first-quarter data-center sales surged 83% to a record $3.75 billion from $2.05 billion in the year-ago period, while analysts had expected $3.6 billion. On the call, Kress told analysts the company sees "continued momentum going forward," and that "customers remain supply constrained in their infrastructure needs."
"All of the these different factors, whether it's just the industrial recognition of the importance of AI, the transformative nature of these new AI models, recommender systems, large language models, conversational AI, the thousands of companies around the world that are using Nvidia AI in the cloud driving public cloud demand," Nvidia Chief Executive Jensen Huang told analysts on the call. "All of these things are driving our data-center growth, and so we expect to see data-center demand remain strong."
Nvidia reported first-quarter net income of $1.62 billion, or 64 cents a share, compared with $1.91 billion, or 76 cents a share, in the year-ago period. Adjusted earnings, which exclude stock-based compensation expenses and other items, were $1.36 a share, compared with 91 cents a share in the year-ago period. All figures are adjusted for last year's 4-for-1 stock split.
Revenue surged to a record $8.29 billion from $5.66 billion in the year-ago quarter.
Analysts had forecast $1.30 a share on revenue of $8.12 billion, based on Nvidia's forecast of $7.94 billion to $8.26 billion.
Nvidia results follow those from major chip makers like Advanced Micro Devices Inc. (AMD), Intel Corp. (INTC) and Qualcomm Inc. (QCOM), while Broadcom Ltd. (AVGO) is scheduled to report on June 2.
Over the past 12 months, Nvidia shares are up 8%, while at the same time nearly 50% off their record closing high of $333.76 set on Nov. 29. In comparison, the PHLX Semiconductor Index is down 8% over the past 12 months, the S&P 500 index is down 5%, and the Nasdaq Composite Index is off 16%."