Summary:
- Nvidia’s dropped almost 17% during the after-hours trading after its earnings report on November 15. This was mainly attributed to the demise of crypto-mining boom.
- Nvidia’s Q3 non-GAAP EPS is $1.84, beats by $0.13. GAAP EPS was $1.97, beats by $0.26. Unfortunately, Nvidia’s Q3 revenue of $3.18 billion missed estimates by $60 million.
- Q3’s GPU revenue from OEM was weaker than expected due to the absence of demand from crypto-currency mining. However, Gaming segment’s revenue of $1.3 billion was still up by 13% Y/Y.
- My takeaway is that Nvidia is still worth betting on. The continuing growth in gaming revenue can make up for the lack of demand from crypto-currency mining.
- AMD is still unable to reduce the more than 63% market share of Nvidia on discrete graphics processors. The best-selling computer graphics cards at Amazon are all using Nvidia GPU.
The big 16.77% drop in Nvidia’s (NVDA) stock price after its Q3 FY 2019 was indeed worrisome. Fortunately, the stock recovered and its pre-market price today is $202.64 (+2.54%). It was obvious that several institutional investors dumped their stocks after management acknowledged that crypto-currency demand was absent during Q3. Nvidia had excess inventory of GPU (Graphic Processor Unit) chips during the previous quarter because of this. This is understandable. Ethereum’s crypto-currency price saw a massive drop since June – from $600++ to just over $180 today.
(Source: coinmarketcap.com)
Lack of demand from cryptocurrency miners is partly why Nvidia missed revenue estimates by $60 million. However, Q3’s revenue of $3.18 billion is +21% Year-over-Year(Y/Y). Gaming revenue of $1.3 billion was 2% down Quarter-to-Quarter, but still up 13% Y/Y. This goes to show that the huge PC gaming community can offset the lack of GPU demand from crypto-currency miners.
I expect Q4’s gaming revenue to hit $1.45 to $1.6 billion. The upcoming Black Friday, CyberMonday, and Christmas shopping events will help Nvidia dispose of its excess GPU chip inventory. Yes, there are now tons of cheap, used GeForce cards that crypto-currency miners. However, gamers know all too well that these used Nvidia cards are mining-abused products that aren’t reliable.
Gamers know that a brand-new GeForce card is still preferable to a second-hand one. A brand new GPU card has a one or two-year warranty.
Gaming Is Nvidia’s Main Growth Driver
I am long Nvidia because of its continuing leadership in gaming graphics card. I therefore reiterate a buy rating for NVDA. Advanced Micro Devices (AMD) took some market share in add-in boards (discrete video cards for PC/laptop/workstation PCs). However, as per the most recent analysis of Jon Peddie Research, Nvidia still touts more than 63% market share of the add-in board industry. Over $3 billion/quarter of add-in boards are shipped out per quarter and Nvidia has more than 60% share of that. This is why gaming is still Nvidia’s largest revenue/income generator.
(Source: Jon Peddie Research)
The recent release of GeForce RTX Pascal GPU products is resulting in Nvidia again dominating the best-selling computer graphics cards at Amazon’s online store. Sorry AMD fans. The hourly-updating list on Amazon illustrates that the top 8 best-sellers are all using Nvidia GPU chips. The most-recent GeForce RTX 2070 and RTX 2080 models which retails for more than $550 are all finding many customers on Amazon too.
(Source: Amazon)
The demanding system requirements of new PC games like Red Dead Redemption 2 and Fallout 76 will compel gamers to buy a new GeForce card this year. Red Dead Redemption 2 sold more than 17 million copies within five day of its release (launched last October 26). Many of those who bought this cowboy-themed game will find out that they need at least a 2GB GeForce GTX 1070 to run it decently on medium graphics settings. Using a non-Pascal mid-range card won’t deliver the eye-friendly 60 fps performance on Red Dead Redemption 2.
Takeaway
Nvidia doesn’t really need crypto-currency mining. The demand from PC gamers alone can keep its gaming GPUs deliver double-digit annual growth rate in sales. The ever-increasing system requirements of new PC games is a reliable cash cow for Nvidia. Majority of core and hard core gamers who require the best performance will always choose Nvidia’s brand over AMD Radeon.
Investors should also disregard the rumor of Intel releasing a discrete gaming video card in 2020. It will take many years before gamers start trusting Intel-made GPU cards. There’s no official confirmation of it, but I suspect Intel licensed AMD’s Radeon GPU intellectual properties to develop its own discrete video cards. Unfortunately, we all know that Nvidia’s Pascal GPUs are still the preferred products of gamers. In other words, the rumored Intel gaming GPU is unlikely to offer better performance than an Nvidia GeForce RX 2700/2800.
Another tailwind for the Gaming segment is Nintendo’s (NTDOY) long-running hit Switch hybrid console. The Switch was estimated to be selling 3.19 million units per quarter since its launch (March 2017). The Black Friday/CyberMonday and Christmas shopping season should boost this average to more than 6 million.
NVDA is the better bet compared to AMD. Nvidia touts lower P/E ratios than AMD. This is in spite of Nvidia having the much better balance sheet and margins.
(Source: MarketWatch/Motek)
NVDA also touts very bullish 90-day and 1-year market trend forecasts from I Know First. Going long on Nvidia while it stock trades below $210 and holding on to it until it hits $230++ is a shrewd bet. I Know First’s deep learning stock-picking platform has very high predictability scores for NVDA. It has a long track record of accurately predicting the upward movement of NVDA’s 90-day and one-year performance.
Past I Know First Forecast Success with NVDA
I Know First has been bullish on NVDA shares in past forecasts. On September 24, 2017, an I Know First algorithm issued a bullish 1 year forecast for NVDA with a signal of 323.49 and a predictability of 0.71, the algorithm successfully forecasted the movement of the NVDA share. Since then, NVDA shares have risen 47.18% in line with the I Know First algorithm’s forecast. See chart below.
(Source: Finance Yahoo)
This bullish forecast for NVDA was sent to I Know First subscribers on September 24, 2017. To subscribe today click here.
