What Happened

Nvidia reported its FY 2020 Q4 financials on February 13, and things were strong across the board. Earnings per share were above analyst expectations, as was revenue. Importantly for a computer chip company, its gross margin was higher than expected, showing that it can keep profitability up even amid headwinds, something it will need to be able to do as the coronavirus disrupts electronics production across the world. Its stock was up more than 5% in after-hours trading.

(Below is Investopedia's original earnings preview, published 2/5/20)

What to Look for

Chipmaker Nvidia Corp. (NVDA) has risen at triple the pace of the broader market in the past year as demand has recovered for its products. That's despite major volatility in the stock amid falling profits in the most recent three quarters. The company makes graphics processors and other computer hardware. Now, investors will be watching for further signs of progress when Nvidia reports Q4 FY2020 earnings figures after the market close on February 13. A key metric investors will focus on is Nvidia's gross margin, a key indicator of efficiency and of the company's ability to withstand cyclical turmoil. Analysts estimate that gross margins, earnings and revenue will surge in Q4. Although disappointing financials for Q1 FY2020 sent Nvidia stock tumbling, it has been rising fairly consistently since then thanks to increasing demand for gaming chips and parts used for data centers.

One Year Total Return for S&P 500 and Nvidia
Source: TradingView.

In the Q4 periods since FY2017, Nvidia's revenue has reversed course several times. Between Q4 FY2017 and Q4 FY2018, revenue jumped by 34.0% to $2.9 billion. However, it then fell by 24.3% to $2.2 billion in Q4 FY2019. Analysts expect revenue to once again climb in Q4 FY2020, with predicted gains of 34.3% on revenue of $3.0 billion.

Earnings have largely followed the same path in recent Q4 periods. From Q4 FY2017 to Q4 FY2018, diluted earnings per share (EPS) grew by 79.4% to $1.78. A rocky Q4 FY2019 saw earnings fall by 48.6% year-over-year (YOY) to $0.92. Analysts expect gains once again, although not to the level of Q4 FY2018. Consensus estimates predict a 46.7% YOY increase to Q4 FY2020, with EPS of $1.34.

Nvidia Key Metrics
  Estimate for Fiscal Q4 2020 Fiscal Q4 2019 Fiscal Q4 2018
Earnings Per Share $1.34 $0.92 $1.78
Revenue (in billions) $3.0 $2.2 $2.9
Gross Margin 64.4% 56.0% 62.1%

Source: Visible Alpha

Chip manufacturing companies like Nvidia operate in many ways as commodity businesses. As such, they experience strong cyclical performance fluctuations. This means that Nvidia must retain as much money as possible of each dollar of sales if it is to remain stable across cycles. Nvidia's investors measure the company's ability to do this, in part, by looking to gross margin, the sales revenue that a business retains after incurring direct costs associated with producing the goods it sells and the services it provides.

Save for a dip along with revenue and EPS in Q4 FY2019, Nvidia's fiscal Q4 gross margin has held relatively steady in recent years, even steadily rising apart from the anomalous period last fiscal year. If consensus estimates of 64.4% gross margin for Q4 FY2020 are correct, the company will improve its gross margin by 15.2% YOY. That gross margin would be the highest since Q1 FY2019, when it reached 64.7%. The prospect for boosting margins further has brightened due to rising revenue and the renewed surge in demand for graphics chips.