Nvidia Earnings: What to Look For From NVDA

Nvidia Corp. (NVDA), already a major force in semiconductors, could become even more dominant and reshape the industry with its proposed $40 billiion acquisition of U.K.-based semiconductor design firm Arm Ltd. announced in September. If the acquisition is approved, it would give a major boost to Nvidia’s data center business, which has grown rapidly amid the pandemic. The merger must win approval and survive the close scrutiny of regulators worldwide, including a potential antitrust probe into the deal by British regulators, which was announced in January.

Whether Nvidia’s merger wins approval or not, the company already is growing rapidly. For now, investors will be focusing on whether Nvidia is able to continue posting record-breaking financial results when it reports earnings on February 24, 2021 for Q4 FY 2021. Unlike many other companies closing out their 2020 fiscal year (FY), Nvidia is reporting results for the final quarter of FY 2021, which ended January 31, 2021. Analysts expect both adjusted earnings per share (EPS) and revenue to rise sharply compared to the year-ago quarter, but at a slower pace than in Q3.

Investors will also be watching Nvidia’s data center revenue, a key metric of sales generated by a rapidly-growing segment of the company’s business. Nvidia makes chips used by data centers. Demand for data center services has increased amid the pandemic, causing a related rise in demand for Nvidia’s chips. Analysts expect another quarter of robust growth for the chipmaker’s data center revenue, but at a slower pace than the previous two quarters.

Shares of Nvidia have soared over the past year. The stock plunged with the rest of the market during the pandemic-induced crash of early 2020, but it rebounded at a much quicker pace. By early June, it was one of the S&P 500’s top performers. After a rapid spike in late August, the stock pulled back and made only modest gains over the next five months before taking off again in early February. Nvidia shares have provided a total return of 90.1% over the past 12 months, nearly six times bigger than the S&P 500’s total return of 15.4%.

Nvidia reported Q3 FY 2021 earnings that beat analyst estimates. Adjusted EPS rose at a rapid pace of 63.2%. However, it marked the third consecutive quarter of slowing growth after reaching a peak of 135.5% in Q4 FY 2020. Revenue, on the other hand, accelerated, continuing a trend begun in the previous quarter. Revenue rose 56.8% in Q3 FY 2021 to a new quarterly record. It was also the fastest pace of growth since Q1 FY 2019. Nvidia’s shares traded mostly sideways for the next ten weeks until early February, when the stock broke out.

In Q2 FY 2021, Nvidia’s adjusted EPS also beat analyst estimates, rising 76.4%. However, that rise was slower than in the previous two quarters. Revenue increased 49.9% compared to the same three-month period a year ago. The company’s acquisition of Israel-based semiconductor design firm Mellanox Technologies Ltd. during the quarter helped to boost revenue. Nvidia’s stock shot up over the next couple of weeks following the earnings release, but quickly lost all of those gains during the first week of September 2020.

Analysts are expecting another strong performance in Q4 FY 2021. Adjusted EPS is forecast to rise 49.1%, signaling that the deceleration trend in adjusted earnings continues. Revenue is expected to climb 55.1% compared to the year-ago quarter, only slightly slower than in Q3 FY 2021. For full-year FY 2021, analysts expect adjusted EPS to rise 68.5%, the fastest pace since FY 2017. Annual revenue is expected to expand 51.0%, the fastest pace in at least seven years.

Source: Visible Alpha

As mentioned above, investors will also be focusing on Nvidia’s data center revenue. Nvidia has traditionally specialized in making chips for the gaming and graphics industry, being a pioneer in the development of graphics processing units (GPUs). It turns out that the robust computational capabilities employed by GPUs to power video games and graphics software are also well-suited for technologies like artificial intelligence (AI) and machine-learning. Both of those technologies are increasingly important for the rapidly growing data center market. Nvidia is already benefitting from that growth by building GPUs specifically designed for data center uses. Significantly, Nvidia’s data center revenue has been growing much faster than its gaming revenue in recent years.

While both sources of revenue have received a lift during the pandemic after weak performance in FY 2020, data center revenue continues to rise at a faster pace. Nvidia’s data center revenue grew just 1.7% for all of FY 2020, declining in each of the first three quarters of the year before rising 42.6% in Q4 FY 2020. Growth accelerated to 80.0% in Q1 FY 2021 and then to 167.5% in Q2 FY 2021. The Mellanox acquisition, made in the second quarter, contributed to revenue during that period and also in future quarters of FY 2021. Even with the Mellanox deal, data center revenue growth experienced a slight deceleration to 161.7% in the third quarter, and analysts expect the pace of growth to slow to 93.6% in Q4 FY 2021. For full-year FY 2021, analysts are forecasting data center revenue to rise 123.5%, the fastest pace since FY 2018. At the moment, some investors are watching to see if Nvidia’s recent growth is part of a permanent shift in demand for Nvidia’s products, or whether it’s a spike caused by the pandemic.