Key Takeaways

  • Adjusted EPS was $2.18 vs. the $1.24 analysts expected.
  • Record revenue exceeded analyst expectations.
  • Adjusted gross margin was much higher than analysts expected.
  • Recently acquired Mellanox Technologies Ltd. helped drive revenue growth.

What Happened

Nvidia reported impressive results that surpassed analysts forecasts for Q2 FY 2021, which ended July 26, 2020. Adjusted EPS rose 75.8%, surprising analyst estimates by 10.7%. Revenue rose 49.9% to a record $3.9 billion. The company's adjusted gross margin rose to 66.0%, nearly six percentage points higher than the year-ago quarter. Notably, revenue from Nvidia's data center segment was greater than revenue from its gaming segment for the first time ever as Nvidia increased its focus on enterprise customers.

“Adoption of NVIDIA computing is accelerating, driving record revenue and exceptional growth,” said founder and CEO Jensen Huang. "Despite the pandemic’s impact on our professional visualization and automotive platforms, we are well positioned to grow, as gaming, AI, cloud computing and autonomous machines drive the next industrial revolution around the world," he added.

(Below is Investopedia's original earnings preview, published August 18, 2020)

What to Look For

Nvidia Corp. (NVDA), the Silicon Valley chipmaker, is benefiting from rising demand for computer chips amid the COVID-19 pandemic. The spread of the virus has induced a surge in online activity, including remote work and study as well as video gaming. Investors will be watching to see how increased demand for computing power has benefited Nvidia's chip sales when the company reports earnings on August 19, 2020 for Q2 of its 2021 fiscal year (FY). Analysts expect substantial increases in adjusted earnings per share (EPS) and revenue.

Analysts will also be focused on Nvidia's adjusted gross margin, a key metric for sellers of commodities, such as computer chips. Analysts expect that key metric to rise modestly compared to the same quarter a year ago.

Shares of Nvidia have outperformed the broader market over the past year, but especially during the coronavirus pandemic. The stock crashed with the rest of the market as fears mounted over the spread of COVID-19, but has since rebounded and reached new highs. Nvidia's shares have provided investors with a total return of 189.8% over the past 12 months compared to the S&P 500's total return of 15.7%.

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

Nvidia has beaten analysts' earnings estimates in each of the past four quarters. Adjusted EPS grew 104.5% in Q1 FY 2021, which ended April 26, 2020. It was the fourth-fastest rate of earnings growth in the past 17 quarters. Revenue grew a robust 38.7%. Nvidia's shares have continued to climb higher since the report.

The company's Q4 FY 2020 results were especially noteworthy as they represented a significant turnaround. Adjusted EPS grew 135.5%, marking the fastest pace of growth since Q1 FY 2019, and the first increase after four consecutive quarters of year-over-year (YOY) declines. Revenue rose 40.8%, also following four consecutive quarters of YOY declines. Nvidia's shares initially jumped and continued to rise over the subsequent week before being dragged down by the coronavirus-induced market crash.

Analysts are expecting continued strength from the chipmaker for Q2 FY 2021. Adjusted EPS is forecast to grow a robust 59.7%. Revenue is estimated to rise 41.6%, which would be the fastest pace of growth since Q1 FY 2019.

Nvidia Key Metrics
  Estimate for Q2 FY 2021 Q2 FY 2020 Q2 FY 2019
Adjusted Earnings Per Share ($) 1.97 1.24 1.94
Revenue ($B) 3.7 2.6 3.1
Adjusted Gross Margin (%) 61.9 60.1 63.5

Source: Visible Alpha

As mentioned above, semiconductors are a commodity good, meaning that they are, to a large extent, fungible. Therefore, each firm's pricing power is limited and keeping costs low is essential. This makes gross margin a key metric for chipmakers like Nvidia. Gross margin is total revenue minus cost of goods sold (COGS). It is usually then divided by total revenue to express it as a percent, allowing for easy comparison between different time periods or companies.

Nvidia reported adjusted gross margin of 65.8% in Q1 FY 2021, marking the highest it's been in the past 17 quarters. For each quarter of FY 2020, the company's adjusted gross margin ranged between 59-65%. Analysts are expecting Nvidia to report a figure of 61.9% for Q2 FY 2021, which would be a nearly two percentage point increase YOY. However, it would be several percentage points below the adjusted gross margins reported in the past three quarters.