Nvidia: Surprising Reaction To Q2 Earnings

Nvidia: Surprising Reaction To Q2 Earnings

Investment Thesis

Nvidia: Surprising Reaction To Q2 Earnings: Nvidia’s (NVDA) Q2 2019 results, as one would expect, beat expectations on the top line and bottom line. Yet, the stock sold off nearly 5% after-hours Thursday and early Friday. One should at least consider the fact that Nvidia’s outstanding performance is more than accounted at its present valuation.

Q2 2019 Results

Once again, Nvidia delivers impressive results, with record revenue from all platforms. On the top line, it was up 40% to $3.12 billion and on the bottom line, its non-GAAP diluted EPS nearly doubled, with 92% YoY growth. Undisputable tremendous results, as Nvidia continues to be disciplined with its cost structure allowing it to positively benefit from strong operating leverage.

Having said that, sequentially, Nvidia’s performance was a touch less impressive, with its top line falling 3% sequentially. Also, Nvidia failed to match the tight level of spending in the previous quarter, making Nvidia’s operating leverage was not as strong, and forcing its non-GAAP diluted number to fall by 5% Q/Q.

Now onto the forward guide, Nvidia’s top line is expected to increase sequentially by 4%. Yet in Q3 2019, investors should note that the phenomenally lean structure seen in Q2 2019 should to a small extent reverse, with its gross margin coming down from 63.5% seen this quarter to 62.8% in Q3 2019. Further, while Nvidia’s operating expenses margin will keep steady going into Q3 2019 at roughly 22%, its tax rate will increase. In Q2 2019 GAAP tax was approximately 2.5%. Going forward into Q3 2019, Nvidia’s GAAP tax is expected to jump to approximately 9%.

The Big Takeaway

Nvidia’s gaming segment continues to see phenomenal demand and was up 52% YoY to $1.8 billion. CFO Kress attributed its strong performance to Nvidia’s Max-Q technology being packed into slim notebooks.

Thus, while gaming remains by far Nvidia’s biggest segment, it was its data center segment which was particularly phenomenal with 83% year-on-year growth and now accounts for nearly a quarter of Nvidia’s total revenue, up from approximately 19% of total revenue in the same period a year ago. Whilst demand in datacenter continues to expand at a large clip, it is nevertheless impressive just how much Nvidia continues to grow and arguably outpacing this sector’s growth. Kress discussed on the earnings call, how the demand amongst hyper-scale customers looking to increasingly leverage AI through Nvidia’s computing platform, continues to provide strong tailwinds to Nvidia.


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