What Happened

Nvidia reported earnings after market close on November 14. It reported $1.45 in earnings per share and $3 billion in sales, beating both earnings and revenue expectations. In addition, its gross profit margin grew to the widest point since the quarter ending April 2018, reversing the decline of the last few quarters.

(Below is Investopedia's original earnings preview, published 11/6/19.)

What to Look For

Graphics processor maker Nvidia Corp. (NVDA) has begun to regain some of its lost momentum since last fall, when the stock plunged after rising nearly 14-fold in the previous five years. In November of 2018, disappointing guidance and below-consensus revenue pushed Nvidia stock down by 19%. But the stock is up more than 50% this year on growing demand for gaming chips and parts used in data centers. To measure that progress, investors should look to the key metric of gross margin when Nvidia reports earnings on November 14 for fiscal Q3 2020. Despite Nvidia's soaring stock, analysts expect a moderate decline in revenue and a more significant drop in GAAP earnings per share for Q3.

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

The consensus estimate for Nvidia's fiscal Q3 predicts GAAP EPS of $1.25 and revenue of $2.92 billion. The EPS expected for Q3 is lower than both Q3 2019 and Q3 2018. And while Q3 revenue this year is slightly lower than a year earlier, it's still markedly higher than revenue from fiscal Q3 2018. Notably, analyst predictions for the upcoming Q3 report mark gains in both EPS and revenue on a sequential basis over the prior three quarters. In fiscal Q2 2020, for instance, Nvidia reported EPS of $0.90, a 9% surprise, and revenue of $2.6 billion, a 46% surprise.

Nvidia Key Metrics
  Estimate for Fiscal Q3 2020 Fiscal Q3 2019 Fiscal Q3 2018
Earnings Per Share $1.25 $1.97 $1.33
Revenue (in billions) $2.92 $3.18 $2.64
Gross Margin N/A 60.4% 59.5%
Sources: YCharts and Nvidia

The chip manufacturing industry functions in many ways like a commodity business. For Nvidia, the ability to retain as much money as possible out of each dollar of sales is crucial. For this reason, Nvidia's investors look to gross margin, which is the sales revenue a company retains after incurring the direct costs associated with producing the goods it sells and the services it provides. Nvidia's gross margin in recent fiscal Q3s has been fairly steady, with an increase from 59.5% in fiscal Q3 2018 to 60.4% in fiscal Q3 2019. There is no analyst consensus estimate for gross margin for fiscal Q3 of this year, but Q2 saw a slight decline to earlier levels with gross margin of 59.8%.

If the revival in sales for graphics chips and data center materials continues into the most recent quarter, Nvidia could be well-positioned to increase revenue going forward. It also may possess an advantage in its early ventures into graphic chips designed to integrate with artificial intelligence software. However, growing competition from rivals like Advanced Micro Devices Inc. (AMD) and the massive Intel Corp. (INTC) necessitates that Nvidia maximize its capital efficiency if it is to maintain its performance going forward.

(Correction: Investopedia incorrectly reported Nvidia's gross margin numbers for FY 2018 Q3 and FY 2019 Q3. They have been corrected.)