Shares of NVIDIA (NVDA 160.24, +5.71, +3.70%) have climbed 3.6% after the company beat lowered earnings expectations for the fourth quarter.
The positive response was brought on by guidance that could be categorized as "better-than-feared" after the company made several large cuts to its outlook in recent months. The company shared expectations for Q1 revenue between $2.16 bln and $2.24 bln, which, on the top end, represents a 4.3% shortfall to consensus expectations. Gross margin fell to 54.7% from 61.9% one year ago, but the company expects an improvement to 58.8%-59.0% during the first quarter.
The early response to the report has lifted shares to where they traded after the company reported weak Q3 results in mid-November. While the market has reacted favorably to yesterday's report, investors should keep an eye on a couple items that will provide insight on how the company is recovering from a slump that began in late 2018:
For the third quarter in a row, the company saw its inventory grow to a new record. Inventory increased to $1.58 bln in the fourth quarter from $1.42 bln in the third quarter and $1.09 bln in the second quarter.
An inventory build-up is not unusual ahead of a new product release, but NVIDIA launched RTX cards in late September to mediocre demand with no recent signs of significant improvement in sales.
Two quarters ago, NVIDIA said it expects that channel inventories will normalize over "the next quarter or two", which would enable the company to push more of its inventory to retailers. At first, the channel inventory glut was blamed for leftover supply of GTX cards, but this quarter, the company acknowledged that new RTX cards have not been selling nearly as well as the company had hoped for. The new cards are more expensive than the previous generation and there is still very little content that takes advantage of the new technology embedded in RTX cards.
The company guided for a sequential improvement in gross margin, which points to expectations for an improvement in sales of the company's flagship product line. However, if consumers refuse to pay the premium for RTX cards, the company will be pressured to lower selling prices, which will weigh on margins. Price cuts are also likely if NVIDIA observes that customers are opting for lower-priced cards made by AMD (AMD 23.99, +0.86, +3.70%).
NVIDIA is down 44.0% from a record high that was notched in early October and up 31.5% from its late-December low.