- Nvidia’s (NVDA) fundamentals are robust due to the use of its graphics processing units. However, macroeconomic headwinds could have hindered the firm’s first-quarter progress.
- The company is set to write-off $1.3 billion from its failed ARM acquisition.
- Accounting practices and tax assets suggest that Nvidia’s first-quarter earnings report is on a knife’s edge.
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Nvidia’s (NYSE:NVDA) first-quarter earnings (Q1) report is due on May 25. This is one of the most unpredictable earnings releases I’ve seen in a long time. There’s an array of economic, industry, and accounting metrics that provide conflicting evidence, forming a vacuum of uncertainty. Nonetheless, there are ways to call the result and I’ve outlined a few factors to consider. I encourage my readers to do their own research as my claims are theory-based and I don’t have internal knowledge of the company.
Nvidia is expected to report revenue of $5.38 billion and earnings worth $3.28 per share. If this estimate comes to fruition, Nvidia’s quarterly revenue will have decreased by $2.26 billion and its earnings per share will have increased by $1.96. I don’t expect that to be the case and think that Nvidia’s earnings will be a mixed bag. Here’s why.
Nvidia’s Operational Activities
Nvidia has garnered much support for its graphics processing units (GPUs), with its GeForce RTX-30-Series products being considered a “best-in-class” for gaming purposes. Furthermore, Nvidia’s A-100 Tensor flow has continued to attract interest for data center use. I’m a massive fan of any company that sells high-quality GPUs due to the surge in use cases for image recognition networks among enterprise and individual consumers. The global pandemic lockdowns have brought about a technological surge, adding volume to the GPU consumer base.
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From a central processing unit (CPU) vantage point, I don’t see anything that would affect Nvidia’s bottom-line earnings. Sure, the GeForce RTX 3080 is widely appreciated for time-series usage. However, Nvidia’s CPU sales make up for less than 20% of the firm’s revenue. It’s only when Nvidia releases its “Grace” CPU in 2023 that I see the segment bear any weight on earnings.
Lastly, let’s observe a few quantitative metrics. I’m mainly basing my analysis on GPUs. Nvidia has experienced year-over-year sales growth of 61.07%, with most of its exposure pertaining to the GPU market, which is expanding by 32.7% per year. I’d say that the company’s surplus sales growth is justified given that it owns roughly 68% of the market, which explains its substantial gross profit margin of 64.93%. Additionally, Nvidia’s net income per employee adds up to $484,283 in 2021, which suggests that it isn’t feeling the brunt of resilient wage demands.
On the other end of the spectrum, supply-side inflation is a worry as semiconductor delivery wait times have reached 26.6 weeks. Furthermore, rising interest rates could dampen consumer sentiment, causing a drawdown in finished sales from both enterprise and single consumers.
Accounting Metrics for NVDA Stock
Nvidia’s earnings aren’t just related to fundamentals, but also to accounting metrics. First of all, the firm is expected to report a $1.36 billion write-off stemming from its failed ARM acquisition. It is anticipated that the write-off would add $3.55 billion to quarterly operating expenses. This will likely affect the company’s net income; however, the normalized earnings line item is what really matters. Thus, I don’t expect the market to react to the write-off.
Furthermore, Nvidia’s balance sheet holds a deferred asset base worth $972 million. Nvidia may well leverage some of its deferred tax assets during this quarter to make up for potential quarterly shortfalls. This is quite common for companies to do in order to meet their stakeholders’ requirements.
Lastly, I am concerned about Nvidia’s Beneish M-score of -1.75. An M-score above -1.78 suggests that a firm has adopted moderately aggressive accounting practices in recent reporting periods. Thus, if Nvidia reverts to conservative policies for this quarter’s report, we might see an earnings miss.
The Bottom Line on NVDA Stock
All matters considered, Nvidia’s earnings will likely deviate significantly from its target. The company’s fundamentals are robust; however, systemic headwinds have dampened operational efficiency within the semiconductor space. Furthermore, Nvidia’s Beneish M-score suggests that conservative accounting practices might be in the offing, which could lead to a first-quarter earnings miss.
On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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