U.S. Eastern Time, May 16 after hours, NVIDIA released its FY2020 Q1 earnings. Everyone knew it would be ugly, but everyone also wanted to know just how ugly.
NVIDIA Q1 revenue $2.220B, down 31% year over year, up 1% sequentially;
GAAP net income $394M, down 68% year over year, down 31% sequentially.
Surprise? Even this beat expectations. But this so-called "beat" is the result of repeatedly lowered guidance. As a trillion-dollar market cap tech company, I believe our expectations for it cannot be this low — who doesn't have dreams?
Earnings Visualized
Data source: Bloomberg
From the data, overall results were in line with expectations, given the severe prior guidance cuts. But relative to last year's rock-bottom Q4, this year's Q1 shows an upward trajectory. In Huang's words, "NVIDIA is back on an upward trajectory."
Data source: Company Filing
Inventory improvement is one of the few bright spots. Management previously said post-crypto inventory cleanup would finish in the first half, but in absolute terms the task remains daunting.
Data Center Business Did Not Deliver an Upside Surprise
NVIDIA has high hopes for this segment; "PRADA" embodies Huang's vision for the future and the company's direction.
Source: NVIDIA website
Back to reality: this quarter data center was flat, revenue $634M, down 10% year over year, down 7% sequentially, with revenue share also declining from last quarter. The reason mirrors Intel's: in a weak macro environment, large customers are spending cautiously.
Notably, Intel's data center segment gross margin this quarter was 38%, down 12 percentage points both year over year and sequentially — a shocking drop. On NVIDIA's side, a March Deutsche Bank report offers a glimpse. The report came from Deutsche Bank's research team attending NVIDIA's analyst day. It noted that NVIDIA claims FY2019 data center gross margin of 75-80%, but margins vary widely by product. Per Deutsche Bank's estimates, low-end DGX systems carry ~37% gross margin, while high-end data center GPUs carry ~90%.
Data source: Deutsche Bank report
On the earnings call, NVIDIA said data center inference revenue grew significantly both sequentially and year over year. Giants such as Amazon, Alibaba, Google, Microsoft, Baidu, and Tencent have adopted NVIDIA T4 enterprise GPUs in their data centers; internet companies including LinkedIn, Expedia, PayPal, Pinterest, Snap, and Twitter have also adopted NVIDIA enterprise GPUs. Inference now accounts for over 10% of total data center revenue. Additionally, RTX servers and edge computing servers are being deployed.
Overall, NVIDIA's data center revenue is only about 13% of Intel's, leaving huge room, and its 70%+ gross margin is enviable. Given Intel guided Q2 data center revenue up 18% sequentially, a recovery in NVIDIA's data center business is plausible.
Automotive Growth Still Lags Peers
We have long viewed automotive as NVIDIA's new growth engine. But so far, expectations have clearly been too high.
This quarter automotive revenue was $166M, up 14% year over year, up 2% sequentially. Versus peer Intel Mobileye's 38% year-over-year growth, it lags significantly, and the revenue scale leaves NVIDIA behind.
Still, there is good news. The NVIDIA-Toyota partnership is promising; Toyota holds a significant position in the auto industry. NVIDIA's DRIVE AGX platform could see higher volumes through this collaboration and accelerate L2+ adoption. NVIDIA believes the automotive TAM will reach ~$30B by 2025, remaining as optimistic as ever... hope Huang proves us wrong.
Back to Gaming Again
NVIDIA's pillar gaming business bottomed and rebounded. Revenue $1.05B, though down 39% year over year, the decline narrowed from last quarter, and it rose 11% sequentially. The RTX series was initially rejected by the market; NVIDIA capitulated (or perhaps to clear inventory) and launched the GTX 16 series this quarter. Essentially a ray-tracing-disabled RTX, it gained some market acceptance (possibly because it's cheaper).
To promote ray tracing, Huang unlocked the GTX series' "ray tracing seal" at GDC and partnered with Microsoft on Microsoft DirectX Raytracing (DXR), which will further boost ray tracing's "penetration rate" going forward.
With AMD's "compromise" on ray tracing, it further proves ray tracing + DLSS is indeed the future GPU trend. AMD confirmed at GDC that its Navi 20 will feature next-gen ray tracing, and Microsoft and Sony's next-gen consoles will also support ray tracing. The giants' "compromise" unequivocally signals "ray tracing is the real deal."
Speaking of AMD, the Taipei Computex is late this month, where AMD CEO Lisa Su will showcase new Ryzen CPUs and 7nm Navi GPUs — another "AMD, yes" moment. Per overseas leaks, the flagship Navi RX 3090 XT is expected to exceed Radeon VII by 10%+, priced around $500, TDP 225W, likely targeting RTX 2080. But RTX 2080 launched in August last year.
Data source: ZOL, JD.com, official website
Source: ZOL
In today's consumer electronics market, everyone seems fixated on process node — e.g., AMD vs. Intel (essentially TSMC vs. Intel). Intel's 10nm struggles make it feel like AMD's 7nm has pulled a node ahead. Yet even AMD's 7nm GPU doesn't beat NVIDIA's 12nm RTX by a full generation. And TSMC's 7nm may not even surpass Intel's 10nm. Transistor density matters more — like pixel size in phone cameras. Does higher pixel count always mean better photos? Fundamentally, I think everyone has suffered Intel long enough; squeezing toothpaste until not even dregs remain is unbearable for consumers. AMD's rise is good for consumers; competition drives progress.
Expect NVIDIA to bring a 7nm high-end GPU (Titan/RTX 3080?) this year. Supply chain chatter says TSMC has readied 7nm capacity slots for NVIDIA.
On the earnings call, JPMorgan raised the China market: game license approvals and Epic's "unbanning" are positives. Adobe and Autodesk productivity software are also adding RTX ray-tracing support.
NVIDIA's gaming business remains promising. AMD's Navi launch is confirmed for Q3 this year, posing limited pressure on NVIDIA's Q2. Today's PC market growth relies mainly on notebooks, especially gaming notebooks. 9th-gen Core + RTX/GTX 16 configs are poised to become the new mainstream. Per NVIDIA's official stats, Pascal+Turing penetration is ~52%, leaving 48% of devices at GTX 10 series or below — a massive replacement market.
Valuation
Compared to AMD and Intel valuations, NVIDIA is neither the cheapest nor the most expensive. Though both are GPU majors, a sizable gap remains with AMD.
Setting aside product angles, NVIDIA's gross margin has averaged 20+ percentage points above AMD's in recent years. Second, AMD's heavy debt burden means net interest expense weighs heavily on profits.
Source: Bloomberg
Versus NVIDIA's own past two years, the stock now trades at a valuation low. Based on the last two years' time-weighted EV/EBITDA of 26.76x, the implied fair price is $176.57.
PCF Band, Data Source: Wind
Conclusion
Based on the previous full-year FY2020 guidance, revenue was expected to be flat. NVIDIA's current Q2 revenue guidance is $2.55B, down 18.3% year over year but up 14.9% sequentially, giving the market some confidence. However, can the full-year flat revenue target still be achieved?
Due to the "excessive prosperity" brought by Bitcoin last year, FY2019's high base acts like a "Great Wall of Despair" in front of NVIDIA. Assuming FY2020 second-half sequential growth matches the same period in FY2018 (i.e., 2017), full-year revenue would decline 5% year over year, essentially flat. Only a return to FY2017 sequential growth rates can realize the dream of returning to FY2018?
Assuming sequential growth consistent with FY2018, Q2/FY20 uses guidance data
Overall, NVIDIA's data center and automotive businesses warrant continued attention, while the gaming business attempts to get back on track after the crypto winter. The current situation is like a mediocre student who, by chance, once ranked first; the whole class then expects him to stay first. What he must do is work hard to improve and rank first again to prove himself.
Jensen Huang repeatedly emphasized on the earnings call that NVIDIA does "accelerated computing"; one hopes NVIDIA can "accelerate" its return to normal trajectory.