NVIDIA Q3 earnings preview: Where next for NVDA stock?

When will NVIDIA release Q3 earnings?

NVIDIA is scheduled to release third quarter earnings after markets close on Wednesday November 16. A conference call will be held on the same day at 1400 PT, or 1700 ET.

NVIDIA Q3 earnings consensus

Wall Street forecasts NVIDIA will report an 18% year-on-year drop in revenue to $5.8 billion and expects adjusted EPS to drop 40% to $0.70.

NVIDIA Q3 earnings preview

The semiconductor space has been suffering from a myriad of headwinds. Demand has faltered as consumers spend less on tech, some areas are suffering from oversupply and curtailing prices, there are signs businesses are pulling back on infrastructure investment, and geopolitical tensions between the US and China are providing more hurdles. 

NVIDIA has said revenue this quarter will be around the $5.9 billion mark, but markets believe this will come in just short at $5.8 billion.

The company has warned that sales of chips used in gaming consoles and for professional visualisation will be down heavily this quarter because a drop in demand has left the market oversupplied. Its partners and original equipment manufacturers (OEMs) are therefore buying fewer chips from NVIDIA in the hope of rebalancing supply.

Below is a table outlining what Wall Street forecasts in terms of sales for each of NVIDIA’s divisions:

(Source: Q3 estimates from Bloomberg)

Its largest division selling chips that are used in datacentres is expected to see a 29% rise in sales from last year – although that would be the slowest growth delivered this side of the pandemic to show that businesses are also slowing the pace of investment. Revenue from providing chips to the automotive industry will also keep growing with analysts having pencilled-in an 80% jump, although this still only contributes a fraction of overall revenue.

China, which accounts for around 25% of NVIDIA’s sales, will also be a key focus of the earnings this week. US chipmakers were told earlier this year by the government to stop exporting their most advanced chips to China as it tries to disrupt the country’s semiconductor industry. This prompted NVIDIA to warn that up to $400 million worth of quarterly revenue was at risk.

However, Reuters reported earlier this month that NVIDIA has launched a new advanced chip that won’t be impacted by the new US curbs on exports to China, helping install confidence that the company can navigate intensifying geopolitical tensions between the two countries. The A800 chip is thought to have entered production in the third quarter to act as a substitute for the existing A100 units, and this is thought to be the first US chip designed specifically to get around the restrictions.

‘The NVIDIA A800 GPU, which went into production in Q3, is another alternative product to the NVIDIA A100 GPU for customers in China. The A800 meets the US government’s clear test for reduced export control and cannot be programmed to exceed it,’ an NVIDIA spokesperson said in a statement to Reuters.

That means it may now be expecting less of a hit from the curbs than initially expected, although this remains a major threat for NVIDIA going forward.

Sales are now under pressure at a time when costs continue to rise, which means margins are therefore being squeezed. Its adjusted gross margin is forecast to come in around 64.8% in the third quarter, having suffered a dramatic contraction to below 46% in the second. Still, that will be lower than the 67% margin seen last year. This will lead to a second consecutive quarter of lower year-on-year adjusted EPS. Total operating expenses are forecast to be up almost 32% from last year in the third quarter, while R&D costs are forecast to be up 36%.

Notably, Wall Street believes the slowdown being seen in the lucrative datacentre market, the largest division that is solely driving growth at present, will persist in the fourth quarter of 2022 and into 2023. That is significant as gaming and professional visualisation are both forecast to remain in decline until the second half of 2023, which means things could remain challenging for the next three quarters. This combination, twinned with the threats posed in China from the export bans, has the ability to pressure margins going forward and leaves NVIDIA vulnerable to having estimates for next year curtailed further.

There are analysts with more buoyant views on NVIDIA’s near-term prospects.

‘While we still expect NVIDIA to guide Q4 sales to $6.1 billion, down 20% year-on-year, worse than Q3's decline, we still expect the implied +4% quarter-on-quarter recovery as an important signal NVIDIA is past its worst this cycle,’ said BofA Global Research last week.

The broker’s estimate for sales in the current quarter, which will prove highly influential on how markets react this week, is aligned with what the wider market expects, according to consensus figures. The other headline figure to watch out for the fourth quarter is the adjusted gross margin, which Wall Street hopes will be around 64.9%.

Where next for NVDA stock?

NVIDIA shares have soared 45% higher since hitting their lowest level in over two years during October but are still down some 46% year-to-date. Notably, we have seen NVIDIA underperform the market during the selloff this year but outperform it during the recent rally over the past month, with the Philadelphia Semiconductor Index having only risen by 27% since hitting the bottom but only down 31% since the start of the year.

The recent rally, supported by a significant jump in trading volumes, shows that buyers have returned in force over the past month, but we can see that the RSI is now in overbought territory. We have seen this indicator push deep into overbought territory before giving way in the past – with the RSI having hit almost 90 this time last year. That suggests momentum could soon wane and finding higher ground will become more difficult from here.

If the trend continues then the stock is on course to reclaim the August ceiling and break back above $190. Notably, the 44 brokers that cover NVIDIA have an average target price on the stock of $189.37.

If the stock falters and comes under renewed pressure then investors will hope the 100-day moving average, which has been recaptured for the first time since April, can provide some support. Failing that, we could see the $140.50 bottom seen in July, which then turned into a level of resistance in subsequent months, come into play. Any sharper selloff would risk bringing the $108 low back onto the radar.

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