Earnings Watch: Nvidia’s crypto slide and thoughts on earnings recession
Head of Equity Strategy
Summary: In today's equity note we focus on Nvidia which is reporting earnings next week with revenue expected to drop 18% from a year ago as prices on GPUs are falling due to collapsing demand from crypto miners. The recent fallout of the crypto exchange FTX could put the crypto industry in its longest and deepest winter yet and impact Nvidia's business for a long time. FY2023 revenue expectations are down 22% since April. We also take a look at the potential earnings recession as the margin compression intensified in Q3 and could continue next year.
Can Nvidia avoid the crypto vortex?
The earnings season has lost its impact on the overall equity market, but next week’s earnings do offer plenty of interesting earnings releases. Our key focus is Nvidia which reports FY23 Q3 (ending 31 October) on Wednesday. Analysts expect revenue of $5.84bn down 18% y/y and EBITDA of $2.1bn down from $3.2bn a year go and EPS of $0.71 down 30% from a year ago. Despite Nvidia’s lack of mentioning crypto in their earnings statements everyone knows that crypto mining is a big driver of revenue in recent years. Last time the crypto industry went through a crypto winter with mining operations seizing to exist the 12-month forward revenue expectation plunged the most since the Great Financial Crisis. Nvidia’s shares declined 54% from its peak back in 2018 before hitting the bottom.
This time Nvidia’s shares plunged 66% from the peak in November 2021 to the bottom last month as crypto mining operations are no longer as profitable as before shutting down its operations causing an oversupply of GPUs. This has led to lower prices and inventory writedowns for Nvidia. The current FY2023 revenue estimate is €27.1bn down 22% from its peak in April of $34.9bn. The slowdown in crypto mining and the general slowdown in technology thus likely machine learning applications have reduced revenue expectations by staggering $7.9bn. With the latest FTX implosion which have written about here and here, the crypto winter could be very deep and last much longer than the previous one. This means that there is clearly a downside risk to Nvidia’s outlook.
The list below shows the most important earnings releases next week across our universe of more than 2,000 companies that we track during the earnings season.
- Monday: Meituan, Sonova, Tyson Foods, Nu Holdings, Trip.com, DiDi Global
- Tuesday: Infineon Technologies, Vodafone, Alcon, Walmart, Home Depot, Sea Ltd
- Wednesday: Siemens Energy, Tencent, Experian, SSE, Nibe Industrier, Nvidia, Cisco, Lowe’s, TJX, Target
- Thursday: Siemens, Alibaba, Applied Materials, Palo Alto Networks, NetEase
- Friday: JD.com
The inflation celebration and the incoming earnings recession
Yesterday’s moves across all markets were a sign of the bear market as these moves do not happen during bull markets. What made the moves more spectacular were that they happened following a period of recent risk-on. Listen to our podcast from this morning where we discuss the market reaction across all markets. Everyone is celebrating the lower than estimated headline and core inflation figures, but as we write in our equity note from yesterday the inflation rate is getting entrenched in the services sector, so the last chapter has not been written yet.
As we have recent written about the next dynamic is the margin compression and how it will impact earnings going forward. While the margin compression was evident in Q3 the downward revision to 12-month earnings estimates has been minuscule with the current 12-month earnings drawdown being only 3.5%. This fact makes us still cautious on the equity market.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.