Nvidia (NVDA) Earnings: Gaming segment pushes Q3 guidance down by $1 billion

• Nvidia will release official Q2 earnings after the close on August 24.
• Wall Street consensus is for adjusted EPS of $0.52 on $6.7 billion in sales.
• NVDA pre-reported Q2 revenue due to demand weakness.

UPDATE: Extremely poor guidance for the third quarter led Nvidia stock to sell off afterhours on Wednesday. Shares are down a somewhat better 3% in Thursday's premarket at $167. Though it was the second quarter earnings that was the reason for the release, the focus was entirely on Q3. Management said they expected revenue of $5.9 billion for Q3 due to continued deceleration in the gaming segment. Wall Street had expected $6.9 billion. “We are navigating our supply chain transitions in a challenging macro environment, and we will get through this,” said CEO Jensen Huang. This sharply lowered guidance for Q3 comes after management released preliminary Q2 revenue in early August that surprised the market with a $6.7 billion figure, well under the expected $8.1 billion. Nvidia earned adjusted EPS of $0.51 in the second quarter, missing consensus by a penny.

Nvidia (NVDA) will unveil earnings for the second fiscal quarter of 2023 after the close on Wednesday, August 24. NVDA shares are flat in the premarket at $171.76 as the leading fabless semiconductor designer already released preliminary results at the beginning of the month. This was due to material weakness in the semiconductor market that was serious enough for management to try and pre-empt a major sell-off.

Also read: Nvidia Stock Deep Dive Analysis: NVDA price target at $205 with strong revenue growth

Nvidia stock sold off initially after management said that guidance for $8.1 billion in Q2 revenue would instead come in at $6.7 billion. The decline in share price was short-lived, however, at just 10%, and the risk-on August market had NVDA retest the $192 level just a week later.

Wall Street consensus is for adjusted EPS of $0.52 for the quarter, which is well behind adjusted EPS of $1.04 in the second quarter last year.

Nvidia stock earnings

This carefree attitude regarding Nvidia is one reason why investors could easily be caught with their pants down. The market has appeared to take the news in stride as if one bad quarter will assuredly be followed by a certain turnaround in fortunes. That might be the wrong way to view Nvidia ahead of earnings on Wednesday.

The major culprit for the pullback in sales is the gaming segment. Nvidia tries to tie in videogames and the metaverse in this segment that largely centers on its GPU business, but the real rollback in sales appears to be coming from the crypto industry. Crypto miners use Nvidia's premium discrete GPUs to mine various digital securities.

As Ethereum, the second largest crypto, has telegraphed its intention to move beyond mining to a proof-of-stake model, Nvidia has seen demand for its GPUs decline starkly. Between early 2020 and the start of this summer, the Ethereum hash rate rose about six-fold. That requires an awful lot of GPUs. With the "The Merge" – the proposed ending of Ethereum mining – expected to be complete in mid-September, the major drop-off in the hashrate should only continue. With the end of Ethereum mining, an estimated $10 billion in annual demand for GPUs should fall off entirely.

Nvidia's C-suite certainly knows this, and so this decline in their most important product will almost definitely feature prominently in Q3 guidance.

Chart from CoinWarz.com

While preliminary figures show Nvidia's data center segment growing 1% from the first quarter, its gaming division declined 44% QoQ. Dropping by half is unusual and would seem to suggest that GPU weakness might continue for more than one quarter.

Analyst Timothy Arcuri from UBS wrote on Tuesday that Nvidia experienced a decline of about 26% in its GPU prices during the second quarter. 

This is to say that NVDA's near-term movement, at least for this week, will entirely come down to forward guidance. The market is going to require third-quarter revenue guidance well above $7 billion to reduce the general state of anxiety. 

The other shoe to drop may be Nvidia's high multiple. Should the leading maker of GPUs trade at 14 times sales when the sector average is closer to three?

Its closest competitor, Advanced Micro Devices (AMD), trades around six times sales. Can Nvidia afford a price-to-earnings multiple around double the competition when own guidance on margins is plunging? In the preliminary release in early August, Nvidia said that gross profit margins would fall from an earlier expectation of 67% to about 46%. That is quite the sudden loss of pricing power, to say the least.

Nvida stock forecast

After retesting the $172 resistance level after preliminary results were released in early August, Nvidia stock is back where it was after the initial announcement. Do not expect the August 9 low of $167.34 to hold in the case of poor guidance. It is much more likely that NVDA breaks through that support level and trends toward $156. That is a support level that worked in May and June when forecasts for the company were much rosier. If $156 fails to hold and markets decide NVDA stock deserves a lower multiple more in line with an uncertain 12-month demand forecast, then we could easily see Nvidia share price back at the July 5 low at $140.55.

Traders focused on the chart will note the Moving Average Convergence Divergence (MACD) indicator is already showing a lower crossover, which typically foreshadows a period of share price decline. Positive guidance, however, may end all negative opinions and send Nvidia stock back above $192. A break above $192 will place Nvidia back in a bullish trend.

NVDA daily chart