(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Nvidia Corp. (NVDA) shocked investors on January 28 when it said its fiscal fourth quarter revenue would fall short of its November guidance by nearly 18.5%. Even worse, the warning was driven by weakness in its once fast-growing gaming and data center business segments.

What may be most worrisome to investors is that that Nvidia, once one of the high-flying stocks of the 10-year bull market, is no longer growing. When the company announces earnings on February 14, investors will want further details regarding what went wrong, and whether the slowdown is temporary or longterm.

Growth Is Gone

It isn’t just revenue that was hit hard. Gross margins are expected to fall sharply and that means earnings for the quarter are likely to drop, too. Analysts currently estimate earnings of $0.94 per share on revenue of $2.2 billion. Revenue estimates for the quarter have fallen more than 24% over the past 30 days while earnings estimates have dropped a 33%.

Revenue estimates for fiscal 2020 have decreased 20% to $11.85 billion while earnings estimates have dropped by nearly 33% to $5.91 per share, a 45% decline versus a year ago. Analysts currently forecast earnings will decline by 13% in 2020 from 2019.

Nvidia’s two most prominent business units, gaming and data centers, have seen a significant slowdown over the past few quarters. Gaming growth peaked in the fiscal first quarter of last year at 68%, and slowed to 13% in the third quarter. Based on Nvidia’s revenue guidance, that growth probably slowed even further - or even turned negative. Data center growth has slowed rapidly as well.

Margin Erosion

Margins for the quarter are expected to be around 56%, down from prior guidance of 62.5%. Margins have contracted for four quarters in a row after peaking at 64.5% in April of 2018.

The commentary and guidance the company provides for the fiscal first quarter will be the most critical piece of Nvidia’s February results. Investors will listen closely for any insight the company may provide regarding inventory levels and how much of that inventory needs to be worked off.

Betting On A Rebound

The options that expire on March 15 suggest the stock could rise or fall nearly 14% from the $140 strike price. That places the stock in a trading range of $121.25 and $158.75 by options expiration, a massive range. The number of bullish bets at the $140 strike price outnumbers the bearish puts by a ratio of about 2 to 1 which indicates that the stock will rise following results.

The Chart Suggests The Stock Falls

By contrast, the technical chart is bearish and shows that the stock may fall to its lows of around $125 in the coming weeks. The stock has refilled the technical gap up to resistance around $148.50 and is now likely to continue its trend lower to around $128.75.

Nvidia has performed so well in recent years that investors have become accustomed to the company delivering quarter after quarter of remarkable growth. That seems to have changed dramatically. The big question on many investors' mind may be how long it will take for the growth to return – or whether it will return at all. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past 12 months. Past performance is not indicative of future performance.