Nvidia Corp. was built on video games, but for the rest of the year at least, investors and analysts won’t be looking at games when valuing the stock.
Nvidia
NVDA,
cut its second-quarter revenue forecast by $1.4 billion earlier this month, revealing that gaming revenue would fall by more than 30% year-on-year as a lack of supply of gaming cards quickly turned to oversupply amid “crypto winter” and the retreat of pandemic booms for gaming and PC sales. Analysts now expect data center and gaming sales — which have battled for revenue supremacy among Nvidia’s segments in recent years — to show a sharp split in sales, with data centers leading the way.
That’s why maintaining the pace of data center sales growth is so important to Nvidia’s stock performance for the rest of the year, and the warning didn’t inspire much confidence. After Nvidia’s announcement, analysts cut their second-quarter data center sales forecast to $3.81 billion from $4.06 billion, and the third-quarter consensus fell to $4.05 billion from $4.37 billion. according to FactSet.
“Although the business is reduced at this point due to weakness in gaming, some uncertainty remains around the data center,” Morgan Stanley’s Joseph Moore, who has an equal weight rating and a $182 price target, wrote in a note.
Read: Chip stocks fell as pandemic demand for electronics fell, but there were still some gainers
Data center downturns have tripped up Intel Corp.
INTC,
this earnings season and Advanced Micro Devices Inc.
AMD,
results showed some concerns about growth (compared to strong results in previous quarters), and Nvidia may break that relationship with its data center forecast.
“Now it all comes down to how they lead,” Mizuho’s Jordan Klein wrote in a recent note. “The data center is holding up, but I’m afraid that’s the next shoe to drop. “
Analysts expected third-quarter earnings of 86 cents a share from Nvidia on revenue of $6.93 billion, with $4.05 billion from data centers and $2.02 billion from gaming. Achieving these numbers will be important for Nvidia to show that the current issues will be short-term in nature.
“The trajectory to FQ3 is of course the main contention in the near term now (ie whether or not FQ2 represents the bottom),” wrote Bernstein analyst Stacey Rasgon, who has an outperform rating and a $210 price target on Nvidia.
“However, we feel that the buy side would actually like to see a further de-risked FQ3 prospect, which could create a solid setup next year as play-cutting is very similar to the last implosion at the end of FY19 , the upcoming product roadmap looks much more favorable as new products (both in gaming and data center) should be here within the next quarter or two, unlike last time when new product cycles were another 18 months,” Rasgon wrote.
Last quarter, Nvidia’s earnings report mirrored that of Cisco Systems Inc
CSCO,
in that Cisco ran into many of the same supply chain problems that they ran into when the Chinese concluded Shanghai in March because of outbreaks of COVID. Nvidia can hope that’s still the case, since Cisco expects revenue to grow as supply chain issues ease.
What should I expect?
Earnings: Of 27 analysts polled by FactSet, Nvidia is expected to post an average of adjusted earnings of 50 cents per share, down from the $1.04 per share reported a year ago and down from the $1.25 per share initially expected of the quarter.
Income: Wall Street expects $6.7 billion in revenue from Nvidia, according to 26 analysts polled by FactSet. While that’s up from $6.51 billion in sales from the year-ago quarter, it’s well below the $8.12 billion forecast at the start of the quarter.
Stock movement: In Nvidia’s second quarter, or the end of July, shares fell 2%, while the PHLX Semiconductor Index
SOX,
fell by 1.6% during this period. Meanwhile, the S&P 500 index
SPX,
was unchanged while the Nasdaq Composite Index
comp,
has decreased by 0.5%. On November 29, Nvidia shares closed at a record high of $333.76 and have since fallen 49%.
What analysts say
Evercore analyst CJ Muse, who has an outperform rating and a $225 price target, said the downgrade is there and Nvidia’s setup is more positive as a result, but it leaves questions about the company’s near-term growth trajectory.
“The key areas of focus will be around whether or not this reduction is the bottom and GM trends from there,” Muse said.
“So overall, while near-term demand dynamics are likely to remain under pressure given the subdued consumer and macro uncertainty bleeding into corporate spending, we believe the commentary will support intact secular growth drivers across all verticals , solid product cycles led by Hopper and Lovelace (and an option from Grace?), and margin expansion is progressing,” Muse said.
Jefferies analyst Mark Lipasis, who has a buy rating and a $370 price target, said he thinks this cut will be easier to buy than the previous one.
Lipacis said the decline in data center sales is due to the supply chain, and that not only is the overall data center rental market at an all-time high, but vacancies are at an all-time low.
Of the 44 analysts covering Nvidia, 34 have a buy rating, nine have a hold rating and one has a sell rating, with an average price target of $227.12, a 32% premium to the current price, according to FactSet data.