Chip designer and computing major NVIDIA Corporation (NVDA - Get Rating) reported higher-than-expected revenues in the third quarter on the back of solid demand in its data center business. Its revenue was 1.9% above analyst estimates.

The company’s EPS was 17.6% below the consensus estimate. Its gross margin fell 11.6 percentage points to 53.6%. Data center revenue grew 31% year-over-year, while gaming revenue declined 51% from the prior-year period.

The company’s revenue was hit due to soft demand from China and the U.S. government’s ban on the export of GPUs A100 and H100. To counter the financial loss from the ban, the company unveiled the A800 GPU, which would be an alternative to the A100. The A800 complies with the export control rules, and it helped NVDA lessen the financial implication of the ban.

After the pandemic-induced rise in gaming, NVDA’s gaming segment suffered in the third quarter due to the lower GPU sales for desktops and laptops. Moreover, with the severe decline in crypto mining, the demand for its GPU chips has slowed down. With many analysts expecting an extended crypto winter, NVDA’s demand from the crypto market could take a hit.

For the fiscal fourth quarter ended December 31, 2022, NVDA expects its revenue to be $6 billion, plus or minus 2%, compared to analyst expectations of $6.09 billion.

NVDA’s stock has gained 14.4% over the past three months. On the other hand, it has declined 52.5% in price over the past year to close the last trading session at $143.15.

Here’s what could influence NVDA’s performance in the upcoming months:

Disappointing Financials

NVDA’s revenue declined 16.5% year-over-year to $5.93 billion for the third quarter ended October 30, 2022. Its non-GAAP operating income declined 54.6% year-over-year to $1.54 billion. The company’s non-GAAP net income decreased 51% year-over-year to $1.46 billion. Also, its non-GAAP EPS came in at $0.58, representing a decline of 50.4% year-over-year.

Mixed Analyst Estimates

Analysts expect NVDA’s EPS for fiscal 2023 is expected to decline 25.7% year-over-year to $3.30. On the other hand, its EPS for fiscal 2024 is expected to increase 32.5% year-over-year to $4.37. Its revenue for fiscal 2023 and 2024 is expected to increase 0.1% and 9.2% year-over-year to $26.94 billion and $29.43 billion, respectively.

Its EPS and revenue for the quarter ending January 31, 2023, is expected to decline 39.3% and 21.2% year-over-year to $0.80 and $6.02 billion, respectively.

Stretched Valuation

In terms of forward EV/S, NVDA’s 13.03x is 424.8% higher than the 2.48x industry average. Likewise, its 13.08x forward P/S is 429.3% higher than the 2.47x industry average. Also, its forward P/B of 16.02x is 316.2% higher than the 3.85x industry average. Likewise, its 39.10x forward EV/EBIT is 149.8% higher than the 15.66x industry average.

High Profitability

NVDA’s 20.85% trailing-12-month net income margin is 542.5% higher than the 3.25% industry average. Likewise, its 25.52% trailing-12-month EBIT margin is 285.4% higher than the 6.62% industry average.

Furthermore, the stock’s 18.04% trailing-12-month levered FCF margin is 141.1% higher than the 7.48% industry average.

POWR Ratings Reflect Bleak Prospects

NVDA has an overall D rating, equating to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NVDA has a D grade for Value, consistent with its stretched valuation.

It has a D grade for Stability, in sync with its 1.75 beta.

NVDA is ranked #80 out of 92 stocks in the Semiconductor & Wireless Chip industry. Click here to access NVDA’s Growth, Momentum, Sentiment, and Quality ratings.

Bottom Line

NVDA’s stock is trading below its 50-day and 200-day moving averages of $153.62 and $169.66, respectively, indicating a downtrend. Although its revenues declined year-over-year, its data center revenues displayed strong growth.

The softness of consumer demand in China and the weak demand for GPUs to be used in gaming and crypto mining will likely keep NVDA under pressure. Moreover, NVDA’s top and bottom lines could remain under pressure, with the global economy expected to face a slowdown.

Given its disappointing financials and stretched valuation, it could be wise to avoid the stock now.

How Does NVIDIA Corporation (NVDA) Stack up Against Its Peers?

NVDA has an overall POWR Rating of D, equating to a Sell rating. Therefore, one might want to consider investing in other Semiconductor & Wireless Chip stocks with an A (Strong Buy) or B (Buy) rating, such as United Microelectronics Corporation (UMC - Get Rating), STMicroelectronics N.V. (STM - Get Rating), and Advanced Energy Industries, Inc. (AEIS - Get Rating).

NVDA shares were trading at $143.23 per share on Wednesday morning, up $0.08 (+0.06%). Year-to-date, NVDA has declined -1.99%, versus a -0.32% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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