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Nvidia stock drops on preliminary earnings warning

Yahoo Finance Live anchors discuss Nvidia expecting to miss on second-quarter earnings estimates.

Video transcript

- We're just a few minutes away from the opening bell on Wall Street. But let's take a look at shares of Nvidia. Again, as we discussed moments ago, Nvidia out with a surprising warning here, regarding their sales and their profits, citing real weakness in the gaming segment.

And guys, I just said surprising. Maybe it shouldn't be surprising because we've seen weak results from Micron, Intel. AMD, last week, lowered its forecast, sales under pressure in its gaming business. So here's Nvidia dropping the hammer of its own.

- And our Dan Howley also wrote about what's going on with the gaming companies more broadly. And that this is going to be a tough year. He said maybe next year we'll be getting a little bit better in terms of the pace of releases. So that might also have implications for the chip makers.

But you see here, I mean, nothing is down as much as Nvidia, obviously. But AMD also down about 2% even though it already had its own warning.

- Right. And it's on this expected continuity, as well. Jensen Huang, who is the CEO of Nvidia, and founder, saying that they expect the macroeconomic conditions to continue. And that's going to affect sell through.

And that's going to allow them, or at least problems for them right now, to take actions with their gaming partners and adjust channel prices and inventory.

But this all meant that the gaming product sell through, it declined significantly as the quarter progressed. And that's why they got to get out ahead of the actual earnings that are set to take place later on this month.

- Yeah. Just a couple of other things to mention here. What's going on with the dynamics of the chip industry is what we are seeing in a lot of other industries right now, which is the sort of pandemic catch up.

And this is reflected in some comments from the CFO Colette Kress, who says the significant charges incurred in the quarter-- remember, we told you $1.32 billion of charges-- reflect previous long-term purchase commitments we made during a time of severe component shortages and our current expectation of ongoing macroeconomic uncertainty.

So in other words, it's like what we're seeing in retail. Right? Companies had to sort of scramble to adapt to a scarcity mindset. And now that is flipping once again. And they're stuck with this extra inventory.

The company does say they believe their long-term gross margin profile is intact, which is key for a company like Nvidia or any of the chip makers.

- That's positive. And look, the next shoe to drop here is a warning from PC makers like Dell and HP, perhaps pretty significantly. And if you're not a believer that some of these chip warnings are a sign of what could come from the PC makers, look at Best Buy.

We're about two weeks removed from a warning from Best Buy about a sales slowdown. And inventory is likely starting to pile up. So again, a couple of weeks when those two report. Could be ugly.

- You know, key thing here, too, is one of the other major fronts for this entire industry is the Data Center. And that really relies on some of those larger corporate partners continuing to spend at the rate that they have.

And that's something that would actually prompt them to be able to hold on to some of that gross margin profile in addition to something that you mentioned earlier, which was the cost management side of these businesses as well.

- Yeah, definitely. I'm just looking at some of the other. So, gaming is expected to fall 33% year over year, the company says. Data Center still up 61% year over year.

- Corporations are still spending. It seems to be consumer weakness is why these companies are hurting.

- I mean, automotive, which has been a big growth area that they've been emphasizing over at Nvidia, and at the other chip makers for that matter, that's still seeing growth as well. So really, gaming seems to be the big miss here in this guidance.

There, we got the opening bell here on this Monday morning. And it looks like we are set to have a higher open. With this in Nvidia news, we'll see if there's any sort of wavering of that.

There's been a lot of talk, during this earnings season, that earnings are still outpacing expectations, a little bit of a lower rate, percentage rate, than they have in prior quarters. But given how dismal the outlook was going into this quarter, by and large, things have been a bit better than expected.

But then you get this kind of cut, and we're sort of getting a resetting of expectations, certainly during this earnings season, I think.

- Which major company has not come out and had to issue some type of warning or guidance ahead of them, actually reporting their earnings for the most recent quarter and for what their outlook may look like? So that's the persistence of the macroeconomic conditions that a Nvidia is citing here.

But even more internationally, we had heard from Microsoft earlier on. We heard from Target and Walmart early on. You've got the two biggest retailers here in the US covered. You've got one of the biggest tech companies, a megacap blue chip tech name covered. And now, Nvidia here on the day as well.

- And part of the reason, the problem, you're seeing big declines in Nvidia here, and a lot of other names, they're still priced for growth. They're valued as if they're going to continue at the same growth rates they had been delivering the past two years.

I'm on a platform right now. I mean, Nvidia is still going to trade, even after the sell off, maybe 32, 33 times forward earnings. That's about two times the multiple on the S&P 500.

I mean, the valuations on these companies are shocking. And the market is not adjusted.