Nvidia resets expectations with warning of quarterly miss due to gaming weakness

Published Mon, Aug 8 202211:34 AM EDT

Nvidia (NVDA) warned on Monday that its second-quarter earnings would widely miss Street expectations when the chipmaker reports results on Aug. 24. While we didn't get all the details of an actual earnings announcement, the preliminary data shows sales coming in at $6.7 billion, far below FactSet estimates of $8.1 billion. Non-GAAP gross margin is estimated at 46.1%, well below expectations of 67.1%. In the release, Nvidia founder and CEO Jensen Huang laid much of the blame on weakness in gaming, noting its projections declined significantly as the quarter progressed. "As we expect the macroeconomic conditions affecting sell-through to continue, we took actions with our Gaming partners to adjust channel prices and inventory." In a nut shell: Management cut prices to help reduce its inventory. The company expects weakness to persist into the third quarter. On a more positive note, CFO Colette Kress said the company's "long-term gross margin profile is intact." She noted the company has slowed operating expense growth, is balancing investments for long-term growth while managing near-term profitability. A key point: Nvidia plans to continue stock buybacks as it sees strong cash generation and future growth. By segment the results were as follows: Gaming: $2.04 billion vs. $3.077 billion expected Data center: $3.81 billion vs. $4.057 billion expected Professional visualization: $500 million vs. $628 million expected Automotive: $220 million vs. $160 million expected OEM and other: $130 million vs. $160 million expected Management pointed out that while data center sales are a record, they still came up short versus expectations because of supply chain disruptions. That is an important callout. While gaming demand has clearly deteriorated, it shows data center demand remains relatively resilient. Some are likening today's news to what happened in 2018, when crypto crashed and miners turned to selling their Nvidia chips in the second-hand market; Nvidia shares took a hit. But things are different now. Gaming in 2018 accounted for 57% of sales, with data center making up just 25%. Today, gaming contributes 38% of revenue and data center accounts for 50% of the top line. So while the news today definitely isn't good, the weakness in gaming has more of an offset this time around thanks to the larger revenue share data center. Bottom line We believe this preannouncement serves as a clearing event aimed at resetting expectations. Investors can now approach the stock with a bit more certainty about what to expect in coming quarters. Remember, investors can handle both bad and good news, it's uncertainty that really hurts stocks; you can't forecast well with uncertainty. All that said, we don't think there is a rush to step in right here despite today's decline. Shares are up roughly 25% since bottoming on July 1, and sell-offs on this kind of news can last a few days. As for the other semiconductor names in our portfolio, we think today's update reads best for Marvell Technology (MRVL), given that it is the heaviest weighted to the data center. Qualcomm (QCOM) is flat today thanks to its low price-to-earnings multiple and an increasingly diversified revenue stream. Finally, Advanced Micro Devices (AMD) has the benefit of reporting just last week, which means that the guidance provided likely incorporated most, if not all, of the market conditions that hurt Nvidia. (Jim Cramer's Charitable Trust is long AMD, MRVL, NVDA, QCOM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Jen-Hsun Huang, president and chief executive officer of Nvidia Corp., speaks during the company's event at Mobile World Congress Americas in Los Angeles, California, U.S., on Monday, Oct. 21, 2019.

Patrick T. Fallon | Bloomberg | Getty Images

Nvidia (NVDA) warned on Monday that its second-quarter earnings would widely miss Street expectations when the chipmaker reports results on Aug. 24.