Nvidia (NASDAQ:NVDA) Surprises With Q3 Sales But Quarterly Guidance Weaker Than Expected

Jabin Bastian /
2022/11/16 4:29 pm EST

Leading designer of graphics chips Nvidia (NASDAQ:NVDA) reported Q3 FY2023 results that beat analyst expectations, with revenue down 16.5% year on year to $5.93 billion. However, guidance for the next quarter was less impressive, coming in at $6 billion at the midpoint, being 2.23% below analyst estimates. Nvidia made a GAAP profit of $680 million, down on its profit of $2.46 billion, in the same quarter last year.

Is now the time to buy Nvidia? Access our full analysis of the earnings results here, it's free.

Nvidia (NVDA) Q3 FY2023 Highlights:

  • Revenue: $5.93 billion vs analyst estimates of $5.81 billion (1.91% beat)
  • EPS (non-GAAP): $0.58 vs analyst expectations of $0.70 (17.6% miss)
  • Revenue guidance for Q4 2023 is $6 billion at the midpoint, below analyst estimates of $6.13 billion
  • Free cash flow was negative $156 million, down from positive free cash flow of $824 million in previous quarter
  • Inventory Days Outstanding: 147, up from 93 previous quarter
  • Gross Margin (GAAP): 53.5%, down from 65.1% same quarter last year

“We are quickly adapting to the macro environment, correcting inventory levels and paving the way for new products,” said Jensen Huang, founder and CEO of NVIDIA.

Founded in 1993 by Jensen Huang and two former Sun Microsystems engineers, Nvidia (NASDAQ:NVDA) is a leading fabless designer of chips used in gaming, PCs, data centers, automotive, and a variety of end markets.

The biggest demand drivers for processors (CPUs) and graphics chips at the moment are secular trends related to 5G and Internet of Things, autonomous driving, and high performance computing in the data center space, specifically around AI and machine learning. Like all semiconductor companies, digital chip makers exhibit a degree of cyclicality, driven by supply and demand imbalances and exposure to PC and Smartphone product cycles.

Sales Growth

Nvidia's revenue growth over the last three years has been impressive, averaging 44.6% annually. But as you can see below, last year has not been especially strong, with quarterly revenue growing from $7.1 billion to $5.93 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Nvidia Total Revenue

Despite Nvidia revenues beating analyst estimates, this was still a slow quarter with a 16.5% revenue decline. Nvidia's revenue is continuing to decline, signal that the current downcycle is deepening.

Revenue growth is expected to stay negative next quarter with an estimated decline of 21.4% YoY while Wall St analysts still expected revenues to turn positive over the next twelve months with growth of 0.48% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Nvidia Inventory Days Outstanding

This quarter, Nvidia’s inventory days came in at 147, 51 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from Nvidia's Q3 Results

Sporting a market capitalization of $414 billion, more than $13.1 billion in cash and with positive free cash flow over the last twelve months, we're confident that Nvidia has the resources it needs to pursue a high growth business strategy.

It was good to see Nvidia outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, inventory levels are increasing, revenue is in decline and the guidance is indicating that the decline will continue, at even a slightly faster pace than what Wall St analysts were expecting. Overall, this quarter's results were not the best we've seen from Nvidia. The company is up 2.6% on the results and currently trades at $163.56 per share.

Nvidia may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.