Nvidia Q2 FY 2022 Earnings Report Preview: What to Look For

Nvidia Corp. (NVDA) sales have skyrocketed during the pandemic, fueled by strong demand for its processors and also by rising prices sparked by the global semiconductor shortage. The surge in business has been enough to propel the company into the top 10 U.S. public companies by market capitalization. At the same time, Nvidia is expanding its business offerings to include artificial intelligence, machine learning, and data-center services.

Investors will focus on whether Nvidia can maintain its rapid growth when it reports earnings after market close on Aug. 18, 2021 for Q2 FY 2022. Nvidia's 2021 fiscal year (FY) ended Jan. 31, 2021, so the company is now in its 2022 fiscal year. For Q2 FY 2022, analysts predict robust growth in both adjusted earnings per share (EPS) and revenue, although at a slower pace than the previous quarter.

Investors will also be focused on Nvidia's gross margin, a key metric for sellers of commodities that provides an indicator of how much profit is being generated from each dollar of sales. Companies that keep costs low can generate higher margins as they compete on price. For Q2, analysts estimate Nvidia's gross margin will rise relative to the year-ago quarter.

Throughout much of the past year, Nvidia shares traded roughly in line with the broader market, albeit with some wide swings. The stock fell sharply below the market in March 2021 following the company's Q4 FY 2021 earnings report. After that, the shares recouped part of that decline and made a sustained advance during the spring. Since early May, Nvidia shares have significantly outpaced the broader market. As a result, Nvidia shares have provided a total return of 62.0% over the past 12 months, as compared with 32.5% for the S&P 500.

Nvidia Earnings History

Nvidia's adjusted EPS has grown at a rapid pace in recent years. In the last 18 quarters, the company has posted year-over-year (YOY) adjusted EPS declines only four times, from Q4 FY 2019 through Q3 FY 2020. Since that time, YOY gains have been substantial, with three of the six most recent quarters seeing adjusted EPS more than double YOY. Analysts now estimate a slightly slower but still impressive YOY growth rate of 87.2% in Q2 FY 2022.

Nvidia's revenue also has grown at a robust pace in recent years, albeit with a few weak quarters. Similar to EPS, revenue declined during the four quarters from Q4 FY 2019 through Q3 FY 2020. Otherwise, Nvidia's revenue has grown by at least 20% and as much as 83% in each quarter in the past four years. Analysts expect revenue to rise 63.5% YOY in Q2 FY 2022. That growth rate would be faster than Q2 FY 2021, but it would be a deceleration from Q1 FY 2022.

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The Key Metric

As mentioned above, investors will also be focused on Nvidia's gross margin, a key metric that is calculated as 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. Semiconductors are a commodity good, meaning that they are, to a large extent, fungible and their prices highly cyclical. Sellers of such goods have limited pricing power, which means keeping costs low in order to maximize profits when times are good is essential.

Nvidia's gross margin trended higher from Q2 FY 2017 through Q2 FY 2021. During that time it improved from 58.1% to 66.0%. Since then, it has stagnated somewhat, slipping in Q3 and Q4 FY 2021 and improving only slightly to 66.2% for Q1 FY 2022. Analysts now expect gross margin of 66.4% in Q2 FY 2022. This would be the highest gross margin in at least five years.