To The Moon

$NVIDIA Corp(NVDA)$ released the Q3 earnings that beated the market expectations.

Revenue of $5.93 billion, exceeding the consensus estimate of $5.793 billion. It was in line with the guidance given by the management of 5.9 billion.

The market expectation of $NVIDIA Corp(NVDA)$ is very pessimistic, with a drop of 46% during the year.

While the financial report improved slightly, the share price went up-NVIDIA's share price rose by 2.2% in the after-hours market:

Key financial figures

• Revenue: $5.93 billion, exceeding the consensus estimate of $5.793 billion by Bloomberg analysts.

The growth declined 16.5% yoy, back to negative growth after 11 quarters:

data from company earnings; compiled by Value_investing

• Gross profit margin: 53.6%, significantly lower than 65.2% in the same period last year.
• R&D expenses: USD 1.95 billion, up by 38.6% year on year;
• Net income: only 680 million, down 72% year on year.

The impairment loss caused by destocking is as high as $700 million, resulting in a sharp drop in gross profit margin; The high expenses also caused a sharp decline in net income.

• Guidelines for Q4:

The management expected revenue to be USD 6 billion, up and down by 2%;

gross profit margin guidance 63.2%;

The median forecast value was slightly lower than the market expectation of USD 6.09 billion, but significantly higher than in the past 2 quarters.

• Valuations

Investors calculated the valuation based on Nvidia's net income in the past four quarters, and derived a TTM P/E ratio of 66x, which suggested much bubble in share prices.

This valuation method is completely wrong. When the industry is in a downturn, the P/E ratio of cyclical stocks will be abnormally high. And this downturn is only a temporary phenomenon. Therefore, investors don't have to care too much about Nvidia's declining net income.

Earnings by segments

1) Data center revenue was USD 3.83 billion, up 30.6% year-on-year, slightly exceeding the market expectation of USD 3.79 billion:

data from company earnings; compiled by Value_investing

The growth rate of data center slowed down obviously, mainly because the demand for data center in China slowed down significantly.

On earnings call, the management attributed the poor performance of data center to China.

According to NVIDIA's geographical revenue in fiscal year 2022, the revenue from China accounts for 26.4%:

data from company's earnings

In 2022, China was deeply plagued by the pandemic, and consumer demand was low. At the same time, the US restricts the export of high-end chip products to China, causing hundreds of millions of dollars in losses to Nvidia.

2) The revenue of the game business in the third quarter was USD 1.57 billion, exceeding the market expectation of USD 1.32 billion.

Gaming dropped by 51.1% year on year and 23% quarter on quarter.

The decline of gaming is easy to understand, mainly due to the sluggish global PC sales. Besides, the change of cryptocurrency from PoW to PoS has led to a big drop in demand for graphic card mining.

At the earnings call, the management also attributed the decline of gaming to the containment of China pandemic.

3) The revenue of auto business in the third quarter was USD 250 million, up 85.9% year-on-year, and the single quarter revenue reached a record high.

The management has always given high hopes to the auto segment, which is regarded as the next billion-dollar product of Nvidia.

With the evolution of automobile intelligence, the demand for computing power is increasing. More and more new energy manufacturers choose Nvidia Orin chips, and the business prospect is very attractive.

4) Professional visualization's revenue was only USD 200 million, down 65.3% year-on-year.

The management expect destocking will continue in the fourth quarter.

data from company earnings; compiled by Value_investing

Stock price bottomed out

At the earnings call, the management believes that

after the end of the Q4, the inventory of gaming is expected to return to the normal level; revenue is expected to increase month on month.

This confirms the analyst's estimate that the inventory has peaked in the Q3.

In light of Nvidia's performance in the semiconductor down cycle in 2018, the stock price will bottom out when the inventory started to decline:

data from company earnings; compiled by Value_investing

At present, the market predicts that the PC market will still decline by 5%-10% in 2023. Therefore, it still takes time for the semiconductor to resume its growth after the dark time.

Perhaps, Buffett may also consider the Q3 was the lowest point for semiconductor, so he bought $Taiwan Semiconductor Manufacturing(TSM)$ in the third quarter.

Nvidia has passed through the dark moment and may begin to recover.