NVIDIA's advice does not add up – Motley's Fool



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The graphics chip developer's business figure fell 24% in the fourth quarter NVIDIA (NASDAQ: NVDA), result of a series of problems that hit the company at the same time. The overabundance of graphics cards created by the cryptocurrency crash led to a drop in game sales, as well as weak demand from China and the slow uptake of the company's latest RTX 20 cards. Data center growth also slowed as customers became more cautious.

The first quarter of fiscal year 2020 will not be better. NVIDIA is expected to generate revenue of $ 2.2 billion, down 31 percent from the previous year and comparable to the fourth quarter. The good news: NVIDIA expects its annual sales to be stable or slightly down, which is better than expected. The bad news: this orientation for a full year does not make much sense.

2 + 2 = 5 written on the board.

Source of the image: Getty Images.

A difficult path to stagnant income

In order to generate a business turnover close to the same amount for fiscal year 2020 as for fiscal 2019, NVIDIA has to fill the significant shortfall anticipated for the first quarter. Comparisons will be difficult until the fourth quarter, when NVIDIA will record a decline of 24%.

The game is the largest segment of NVIDIA. Here is what the image of the income looks like:

NVIDIA game revenue graph.

Data Source: NVIDIA.

NVIDIA will need to generate approximately $ 800 million in gaming revenue in the last three quarters of 2020, assuming that first quarter gaming revenue is about stable. We do not know how it is even possible.

NVIDIA's CFO, Colette Kress, explained in the call for results that once the cryptocurrency surplus is in place, normalized gambling revenue is expected to be around $ 1.4 billion, of which $ 900 million from computer gaming and the rest of the games on laptops and gaming consoles. Kress arrived at this figure by averaging NVIDIA's gaming revenue, or expected gaming revenue, from the second quarter of 2019 to first quarter of 2020.

Take this number at face value. If NVIDIA generates gaming revenue of $ 1.4 billion in the last three quarters of fiscal year 2020, its total gaming revenue will rise to about $ 5.1 billion this year. This represents a decline of more than 17% over the 2019 fiscal year.

Other segments of NVIDIA may take a bit of slack, although this is not a guarantee. In the data center, NVIDIA saw its hyper-scale and cloud purchases decline on an annual basis in the fourth quarter. The company expects this slowdown to be temporary, but Kress said "our visibility remains low in the current cautious spending environment, and we do not expect a significant recovery in the segment of data centers before the end of the year ".

The data center segment may not generate any growth during the 2020 fiscal year. It could even decrease if the slowdown persists for most of the year. Other segments of NVIDIA, which include professional visualization, automotive, OEM and IP, are too small to have a major impact.

NVIDIA is relying on a strong resumption of games in the second half of the year, well above its "normalized" level, in order to reach its goal. This seems unlikely. NVIDIA's RTX 20 series graphics cards are selling poorly because the company pushed prices too high and did not provide enough value to consumers. Advanced micro systems It is expected that new graphics cards will be launched this year, which will give a new impetus to NVIDIA's projects. And nothing says when demand in China will recover.

For NVIDIA to reach its annual goal, everything has to go well for society. Gaming activity must not only normalize to the level expected by society, but must grow well beyond that of the second half of the year. NVIDIA's management has not been able to see any of its current problems coming from far away. Given his background and some basic arithmetic calculations, his year-round forecasts should be respected.

Timothy Green has no position in the mentioned actions. The Motley Fool owns shares and recommends Nvidia. Motley Fool has a disclosure policy.

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