NVIDIA share price attempting to move higher ahead of Q2 earnings

When does NVIDIA report earnings?

NVIDIA is set to release its quarter two (Q2) financial results on 24 August 2022, after the US market closes.

Nvidia earnings – what to expect

Recent preliminary results came with a negative shock to markets, with Nvidia’s revenue guidance for Q2 at just $6.7 billion. This is a significant 17.3% downward revision in less than three months from the $8.1 billion being guided back in late-May this year. Year-on-year (YoY) growth will translate to a mere 3%,and coming from a hot-favourite growth company which has consistently delivered 40-60% double-digit growth since quarter three (Q3) 2020, a near-flat increase in revenue suggests that economic conditions may be moderating much worse-than-expected.

Its two core business segments, gaming and data centre, are being placed under scrutiny, with the segments accounting for 43.7% and 45.2% of revenue share respectively. The revenue miss was largely due to softer demand for its gaming graphics processing units (GPUs), with gaming revenue guided at US$2.04 billion. This is down 23.8% from its previous forecast of $2.6 billion and a 33.4% decline from the previous year. With the flat revenue growth for Q2, it may suggest that the Covid-19 induced prime for NVIDIA is behind us and the company is entering into a downcycle. Further moderation in economic conditions ahead could drive risk of subsequent downward revisions in forecast. The largely downbeat tone in the cryptocurrency market remains a risk as well, dampening a source of demand for its GPUs.

The relief for NVIDIA is that its guidance for Q2 data centre revenue seems resilient at US$3.81 billion, which will be a 61.0% growth from the previous year but nevertheless, still slightly down 3.4% from its previous forecast of $3.9 billion.

Guidance for Q2 gross margins to be at its lowest since Q3 2011

The preliminary guidance for Q2 margins also brought no relief, with the expected 46.1% gross margin (non-GAAP) marking its lowest since Q3 2011. This may come as a reflection of some easing in supply chains, along with moderating demand, potentially driving some loss in pricing power. The management believed that the long-term gross margin profile remains intact, but with economic conditions set to worsen, the timeline does not seem to be anytime in the near future. That could drive markets to still remain cautious on its outlook, with the 21% shave off its gross margins coming just three months from its previous forecast.

Higher expectation hurdle for NVIDIA to cross ahead

With the 40% plunge in NVIDIA’s share price year-to-date, its share price still stands at US$37.4, which towers above its peer average of around $19.6. The premium suggests that much expectations are still being priced for NVIDIA to outperform over the coming quarters in order to justify its more-lofty valuation. Failure to do so could drive a further re-rating in share price to a fairer value. On the other hand, with its valuation being a stand-out among its peers, its share price could be more sensitive to any move higher in bond yields.

Nvidia shares – technical analysis

With the recovery in risk sentiments over the past month, there has been an attempt for NVIDIA’s share price to recover after plunging 38% year-to-date. Near term, an ascending channel pattern seems to be in place, with the higher highs and higher lows providing an upward bias for now. That said, the flat-lined moving average convergence divergence (MACD) over the past few days suggests some ebbing momentum as the broader market struggles to find a direction. Its share price is currently retesting the $188.30 resistance line, where a key 23.6% Fibonacci retracement stands in place. Overcoming it could draw further upside to retest the upper channel resistance next.