Investing News

Shares in graphics chipmaker NVIDIA Corporation (NVDA) plunged Monday and continued its drop on Tuesday after the company said it expects revenue to come in significantly below its earlier estimate, primarily due to weaker gaming sales.

The Santa Clara, California-based chipmaker released preliminary second quarter (Q2) earnings yesterday, showing revenue reaching $6.7 billion, well below its earlier outlook of $8.1 billion. The revised figures represent the top line contracting 19% sequentially from the previous quarter and 3% from the prior year.

Key Takeaways

  • Nvidia released preliminary Q2 earnings that show revenue of $6.7 billion, well below the chipmaker’s prior forecast of $8.1 billion.
  • The company said weaker-than-expected gaming sales drove the revenue shortfall.
  • Nvidia’s data center sales helped offset gaming weakness, with the segment growing 1% sequentially and 61% from the same quarter a year ago.  
  • Management sees long-term margins remaining intact due to slowing growth in operating expenses.

Gaming Segment Under Pressure

Nvidia flagged softening gaming sales for the Q2 topline shortfall, with the division coming under further pressure during the quarter after seeing sales decline 44% sequentially and 33% from the same quarter a year ago.

“Our gaming product sell-through projections declined significantly as the quarter progressed,” said Jensen Huang, Nvidia’s founder and Chief Executive Officer (CEO). “As we expect the macroeconomic conditions affecting sell-through to continue, we took actions with our Gaming partners to adjust channel prices and inventory, he added.”

Huang remained optimistic about the company’s range of products and expanding markets, noting artificial intelligence (AI) as an exciting opportunity. “NVIDIA has excellent products and position driving large and growing markets. As we navigate these challenges, we remain focused on the once-in-a-generation opportunity to reinvent computing for the era of AI.”

Data Center Revenue Climbs Despite Supply Chain Disruptions

The company also said that supply chain constraints had crimped its data center segment, which management expects to generate $3.81 billion, slightly below its prior forecasts. However, that still represents growth of 1% sequentially from the previous quarter and 61% on a year-over-year (YOY) basis.

Long-Term Gross Margins Remain Steady

In its preliminary results, Nvidia estimates it posted Q2 adjusted gross margins of 46.1%, which is dramatically below its previous guidance of 67.1%. Still, the company said it still expects its long-term gross margin profile to remain intact due to a reduction in operating expense growth. Nvidia also said it remained in a position to generate strong cash flow and continue share repurchase programs.

“We believe our long-term gross margin profile is intact. We have slowed operating expense growth, balancing investments for long-term growth while managing near-term profitability. We plan to continue stock buybacks as we foresee strong cash generation and future growth,” said Nvidia Chief Financial Officer (CFO) Colette Kress.

Nvidia shares staged a strong advance over the past month but still trade down sharply thus far in 2022. By comparison, the iShares Semiconductor ETF (SOXX) – the chip sector’s bellwether exchange-traded fund (ETF) – also has gained over the last month, but has declined less than Nvidia year-to-date (YTD). From a valuation standpoint, the stock trades around 33 times forward earnings, slightly below its five-year average multiple of about 40 times.

Following their plunge on Monday, Nvidia shares were down 4.3% in late morning trading Eastern Daylight Time (EDT).

The chipmaker is expected to announce its formal fiscal Q2 results after the closing bell on Aug. 24.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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