NVIDIA refocuses on its game chips

The group aims to shake off Bitcoin-like volatility with rising gaming GPU sales

NVIDIA is perhaps the best-known technology company whose fate appears to be linked to the rise and fall of Bitcoin. The cryptocurrency is down more than 50% from euphoric December 2017 highs, even after rising sharply from late-2018 lows. In turn, NVIDIA shares remain some 30% lower from their October 2018 record high despite a 26% advance off lows in August.

To an extent, NVIDIA’s slump roughly in unison with Bitcoin and other cryptocurrencies makes a clear point about how much the $55bn maker of specialist chips relies on supplying processing power to coin miners. Demand in that sphere is met by the group’s OEM & IP segment. OEM & IP contributed a modest 6.5% of revenues in NVIDIA’s previous financial year. As such, with revenues down for three straight quarters, albeit exacerbated by imprudently hiked inventories, increasingly aggressive competition in other markets was more to blame. Chiefly, NVIDIA remains a leading provider of the sophisticated chips used for artificial intelligence systems that increasingly operate the world’s data centres. Yet its market share has come under increasing pressure over the last year or so. Advanced Micro Devices and Intel have been deepening inroads into NVIDIA’s server room market as well as its better-known gaming chips business. There will be a stronger focus on NVIDIA's performance in those arenas, when it reports earnings on Thursday night, than on crypto-related sales.

At the same time, the gaming chips business showed sequential growth in Q2 that could soon begin to offset tepid server rooms. The improvement puts guidance in sharp focus: Wall Street expects NVIDIA to back estimates for Q4 sales pointing to about $3.1bn, up almost 40% on the year.

Tariff and trade impacts will also be a concern, whilst a planned acquisition, a chip architecture upgrade and responses to rival AMD processors will all be of interest in the post-earnings conference calls, as well as material distractions for the group in the months ahead. However, with the shares still trading on a higher rating than rivals - almost 31 times estimated current year earnings compared to 22 times for peers - earnings and sales performance still holds key as to whether the stock extends a 55% advance so far this year or curtails it.

Key forecasts

Adjusted Q3 EPS forecast: $1.23, down 14%
Q3 revenue: £2.91bn, -8.5%
Q3 operating profit: 1.053bn, -0.5%
Q4 revenue guidance: $3.067bn, +39%

Consensus source: Bloomberg

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