Our big questions for Salesforce and 2 chip stocks when they report this week

Published Mon, Aug 22 202211:50 AM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

Nvidia (NVDA) already told us its gaming business is under pressure, but how long will it last? And how are the concerns about an economic slowdown changing the behavior of Salesforce 's (CRM) enterprise customers? Those are two of the biggest questions hanging over the earnings reports of three Club tech stocks this week. We'll also hear from Marvell Technology (MRVL), where our eyes will be on the semiconductor firm's data center business. Here's the schedule of earnings: Salesforce after the close Wednesday, conference call at 5 p.m. ET Nvidia also after Wednesday's close, conference call at 5 p.m. ET Marvell Technology after the bell Thursday, conference call at 4:45 p.m. ET Salesforce: How strong are macro headwinds blowing? It's no secret pockets of the economy are cooling — plenty of companies have announced they are slowing or freezing hiring. In some cases, firms are laying off workers. Salesforce itself, for that matter, is taking a "much more measured" approach to hiring. Against this backdrop, the biggest thing we're looking out for in Salesforce's earnings report is how the macroeconomic concerns are impacting companies' software spending. After all, it's those worries about the economy that prompted management teams to adjust their hiring outlooks. Over a longer-term horizon, our thesis in Salesforce remains intact. Digitization and a shift to the cloud are not going anywhere, and the company's software applications enable that for clients. However, it would not be a shock to see in the results — and hear on the conference call — that some of Salesforce's customers are being more prudent in their spending. Indeed, Wall Street's revenue estimates for the quarter ended in July have come down slightly since May. To that end, here's what analysts over at investment bank Oppenheimer had to say on the matter in a note to clients Friday: "Our F2Q23 research mosaic indicates that Salesforce remains a long-term enterprise market-share gainer but that near-term enterprise spending plans on Salesforce, and in general, are under pressure from macro uncertainty," they wrote. "Growth investments for digital transformation are increasing in priority as growth becomes harder to find, but businesses are also rationalizing operating cost structures, which is elongating sales cycles." Salesforce could deliver good news on the operating margin front, Oppenheimer suggested in its note, while raising its price target to $240 on the stock, up from $205. Analysts alluded to the hiring comments we highlighted above as an indication that management is committed to spending money wisely. Operating margin — operating income divided by sales — is a key metric to watch for Salesforce now, as it sheds light on the company's ability to grow profitably. "Beyond the quarterly report, we think management could lay out a mid-20s percent, medium-term operating margin target at its annual investor day next month. Such would see a positive development for the stock," they added. Here is where analyst estimates stand prior to the print, according to FactSet: EPS: $1.03 Revenue: $7.69 billion Free cash flow: $466 million Operating margin: 18.4% Nvidia: Gaming is bad, but for how long? Two weeks ago, Nvidia gave Wall Street a heads up that its second quarter didn't go as planned , sending shares south in the Aug. 8 session. Preliminary results showed second-quarter revenue of $6.7 billion, considerably below estimates of $8.1 billion. Adjusted gross margin of 46.1% was far below the 67.1% expected. The main reason why? Gaming. Now, it's important to note we expected softness here, but the magnitude of the miss is notable and the question is how long will it last? In the second quarter, gaming revenue of $2.04 billion represented a 44% decline sequentially — meaning from the first quarter to the second — when analysts expected $3.1 billion, according to FactSet. Data center sales also fell short of Street forecasts, but not by much: $3.81 billion versus FactSet estimate of $4.06 billion. That's still a record revenue figure for the segment, up 1% sequentially and 61% year over year even as the company said it suffered from supply chain disruptions. These preliminary data center numbers are relatively encouraging because our long-term investment rationale centers on the growth of Nvidia's enterprise end markets like server chips, making the company less vulnerable to cyclical swings in demand for its gaming graphics cards. Nvidia has made remarkable progress on that transformation, delivering innovation in the data center and growing segment revenue to nearly 50% of overall company sales ( based on first-quarter results before gaming demand crumbled). Unfortunately, gaming is still a large chunk of the sales pie — nearly 44% in the first quarter — so when the environment turns sour, you can get this kind of revenue shortfall like in the second quarter. Gaming fell to about 30% of second-quarter revenue, based on the company's preliminary results. The demand erosion impacted profitability, too, because the company lowered prices on gaming chips to help them sell. While this strategy to reduce inventory makes sense, it nevertheless took an ax to adjusted gross margins in the second quarter. What's more: The price cuts Nvidia implemented with its channel partners — other companies that sell its chips — "are expected to persist into the third quarter," the company said in the release announcing the preliminary results. We'll be looking for additional management commentary on Wednesday, both on the conference call and in any sort of formal third-quarter guidance the company provides. The bottom line is we want to know when Nvidia sees a stabilization in gaming, which should help the narrative spotlight shine brighter on the secular tailwinds working in the company's favor. The preannouncement served to reset expectations, as we wrote at the time, but the full quarterly print should inform us on how far along we are in that process. Here is what analysts expect, incorporating the information in the preliminary release, according to FactSet: EPS: 50 cents Sales: $6.699 billion Free cash flow: $2.699 billion Marvell Technology: How's the data center? Marvell is the semiconductor company in our portfolio with the least exposure to consumer end markets, a fact we've pointed out in recent months as the entire industry saw their stocks dragged down thanks to concerns about a sales slowdown in gaming, PCs and smartphones. That made sense for the likes of Micron (MU), Intel (INTC), Qorvo (QRVO) and, to some extent, Club holdings Qualcomm (QCOM) and Advanced Micro Devices (AMD), even though we own those stocks for other reasons. But for Marvell, enterprise and industrial end markets such as data center, 5G and automotive are its bread and butter. That's why we feel its shares have been unfairly punished. In Marvell's most recent quarter, for example, its data center segment was larger than its second and third biggest units combined (enterprise networking and carrier infrastructure). Consumer, where Marvell's chips go into products like printers and broadband routers, accounted for merely 12.3% of total revenue. The question with Marvell is all about what type of data center experience is it having? Will it mirror any of the companies that have already reported — and, if so, which company? In late July, we got a disastrous data enter result from Intel, which said revenue fell 16% year over year. However, that largely seemed to be because of internal operational challenges. Meanwhile, AMD's data center segment performed well considering the operating environment, growing 83% year over year, and management said demand remained strong. Based on the preliminary results we've seen from Nvidia, the source of its data center revenue softness was supply shortages. It remains to be seen if Marvell suffered from any similar component crunches. Here's what Wall Street expects in the quarter, based on FactSet estimates: EPS: 56 cents Sales: $1.517 billion Free cash flow: $588 million (Jim Cramer's Charitable Trust is long NVDA, CRM MRVL, AMD and QCOM. See here for a full list of the stocks.) 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Nvidia CEO Jensen Huang speaks at a press conference on Jan. 7, 2018.

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