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@frosti：The growing chipmaker faces a grueling cyclical slowdown. Nvidia's(NVDA4.01%)stock slipped 5% during after-hours trading on Aug. 24 following the release of its second-quarter report. The chipmaker's revenue rose 3% year-over-year to $6.7 billion, which matched analysts' expectations. However, its adjusted net income declined 51% to $1.3 billion, or $0.51 per share, which missed the consensus forecast by a penny. Those headline numbers were mixed, but a deeper dive into Nvidia's report reveals five bright red flags for its future. 1. Its gaming business has stalled out During the second quarter, Nvidia generated 30% of its revenue from its gaming chips and 57% of its revenue from its data center chips. Both segments had flourished during the pandemic as people stayed home and played more video games, mined more cryptocurrencies with gaming GPUs, and accessed more cloud-based services from data centers. IMAGE SOURCE: GETTY IMAGES. But over the past year, the growth of its gaming business cooled off as the lockdown measures ended. Consumers bought fewer new PCs as they stopped working remotely and returned to their offices, and thecryptocurrency mining marketfizzled out. As a result, Nvidia's gaming revenue plunged 33% year-over-year -- and 44% sequentially -- to $2.0 billion in the second quarter. The robust growth of its data center business barely offset that decline. Period Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Gaming Revenue Growth (YOY) 85% 42% 37% 31% (33%) Data Center Revenue Growth (YOY) 35% 55% 71% 83% 61% Total Revenue Growth (YOY) 68% 50% 53% 46% 3% DATA SOURCE: NVIDIA. YOY = YEAR-OVER-YEAR. During theconference call, CFO Colette Kress attributed the weakness of the gaming segment to "challenging market conditions" -- including "softness in Europe related to the war in Ukraine," "COVID lockdowns in China," and a "diminishing contribution" from the cryptocurrency market. Kress also warned that Nvidia's gaming revenue would decline sequentially again in the third quarter. 2. Its margins are crumbling As Nvidia's revenue growth grinds to a halt, its adjusted gross and operating margins are crumbling. Period Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Gross Margin 66.7% 65.2% 65.4% 67.1% 45.9% Operating Margin 47.2% 37.6% 38.9% 47.7% 19.8% DATA SOURCE: NVIDIA.NON-GAAPBASIS. During the second quarter, its gross margin was squeezed by inventory-related charges as well as purchase commitments it made during the peak of the global chip shortage last year. Meanwhile, its operating margin plunged as it hired more employees, boosted their salaries to counter inflationary headwinds, and invested in the development of new chips. Nvidia expects its adjusted gross margin to rebound sequentially to about 64.5%-65.5% in the third quarter, but that midpoint would still represent a slight decline from the prior year quarter. 3. Its slowdown hasn't ended yet In the third quarter, Nvidia expects its revenue to decline 17% year-over-year to about $5.9 billion. But at the same time, it expects its adjusted operating expenses to increase 32% to $1.8 billion. Therefore, investors should brace for an even uglier earnings report this November. Nvidia didn't provide any additional guidance, but analysts expect its revenue to grow just 13% for the full year as its adjusted EPS drops 8%. That would represent a significant deceleration from its 61% revenue growth and 78% adjusted EPS growth in fiscal 2022. 4. Its valuation doesn't reflect those challenges yet Nvidia's stock has already plunged nearly 50% since it hit its all-time high last November. But at $170, it still trades at 42 times next year's adjusted EPS estimate. That high forward multiple doesn't reflect the grueling cyclical slowdown which it will likely endure over the next few quarters. For example,AMD(AMD4.80%)-- which faces the same headwinds as Nvidia and is growing at a similar rate -- trades at 22 times forward earnings.Intel(INTC3.04%), which is being dragged down by thesluggish PC and data centermarkets, has a forward P/E ratio of 14. Therefore, I wouldn't be surprised if Nvidia's stock gets cut in half again before it's finally considered a turnaround play. 5. Wasteful buybacks and insider sales Nvidia should ideally conserve its cash as its revenue growth cools off, but it spent $5.5 billion on buybacks throughout the first half of fiscal 2023. It still has $12 billion left in its current authorization, which will last through Dec. 2023, and plans to continue those buybacks. But over the past 12 months, Nvidia's insiders also sold more than five times as many shares as they bought. It's generally a bright red flag when a company's management plows a lot of its cash into buybacks -- presumably to offset the dilution from its own stock-based compensation -- but then turns around and quickly unloads those shares on the open market. Nvidia isn't worth buying yet Nvidia is a well-run market leader in GPUs, but it's trading at a premium valuation while facing a cyclical slowdown. Instead of betting on its long-term turnaround right now, investors should wait for the market to reset its expectations for this former high-flying stock before pulling the trigger on Nvidia stock. $NVIDIA Corp(NVDA)$ $Intel(INTC)$
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