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Earnings Outlook: Nvidia stock will be solely a data-center story for the foreseeable future

Nvidia Corp. was built on videogames, but for the rest of the year at least, investors and analysts won’t be concerned with gaming when pricing the stock.


cut its revenue forecast for the second quarter by $1.4 billion earlier this month, revealing that gaming revenue will drop more than 30% from a year ago as a lack of supply for gaming cards quickly flipped to oversupply amid the “crypto winter” and a pullback in pandemic booms for gaming and personal-computer sales. Analysts now expect data-center and gaming sales — which have been battling for revenue supremacy among Nvidia’s segments in recent years — to show a severe sales split, with data-center well in the lead.

That is why maintaining the pace of growth in data-center sales is so crucial to Nvidia’s stock performance the rest of the year, and the warning did not provide a lot of confidence. After Nvidia’s announcement, analysts dropped their forecast for second-quarter data-center sales 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.

“While the business is de-risked at this point for gaming weakness, there remains some uncertainty around data center,” Morgan Stanley’s Joseph Moore, who has an equal-weight rating and a $182 price target on the stock, wrote in a note.

Read: Chip stocks tanked as pandemic demand for electronics slumped, but there are still some winners

Data-center declines tripped up Intel Corp.

this earnings season, and Advanced Micro Devices Inc.

results showed some concerns with growth (compared with strong results in previous quarters), and Nvidia could break that tie with its data-center forecast.

“Now it comes down to how they guide,” Mizuho’s Jordan Klein wrote in a recent note. “Data center holding in, but fear that is the next shoe to drop. “

Analysts expect third-quarter earnings of 86 cents a share from Nvidia on revenue of $6.93 billion, with $4.05 billion from data center and $2.02 billion from gaming. Hitting those numbers will be important for Nvidia to show that the current issues will be short-term in nature.

“The trajectory into FQ3 is of course the major near-term controversy now (i.e. whether FQ2 represents the bottom or not),” wrote Bernstein analyst Stacy Rasgon, who has an outperform rating and a $210 price target on Nvidia.

“However we are getting the feeling that the buy-side would actually like to see a further de-risked FQ3 outlook, which could create a solid setup into next year as while the cut in gaming is very similar to the last implosion at the end of FY19, the forthcoming product roadmap appears much more favorable as new products (in both gaming and datacenter) should be here within the next quarter or two, unlike the last time when new product cycles were a further 18 months away,” Rasgon wrote.

Last quarter, Nvidia’s earnings report mirrored Cisco Systems Inc.’s

in that Cisco encountered many of the same supply chain issues encountered when Chinese locked down Shanghai in March because of COVID outbreaks. Nvidia can hope that’s still the case as Cisco expects revenue to grow as supply-chain problems ease.

What to expect

Earnings: Of 27 analysts surveyed by FactSet, Nvidia on average is expected to post adjusted earnings of 50 cents a share, down from the $1.04 a share reported a year ago and down from the $1.25 a share expected at the beginning of the quarter.

Revenue: Wall Street expects revenue of $6.7 billion from Nvidia, according to 26 analysts polled by FactSet. While that’s up from the $6.51 billion in sales from the year-ago quarter, it’s well short of the $8.12 billion forecast at the beginning of the quarter.

Stock movement: Over Nvidia’s second, or July-ending, quarter, shares declined 2%, while the PHLX Semiconductor Index 

 slipped 1.6% over that period. Meanwhile, the S&P 500 index 

was flat, while the Nasdaq Composite Index 

 declined 0.5%. On Nov. 29, Nvidia’s stock closed at an all-time high of $333.76, and has since dropped 49%.

What analysts are saying

Evercore analyst C.J. Muse, who has an outperform rating and a $225 price target, said that the cut is in and that Nvidia’s setup is more positive as a result, but that leaves questions about the company’s near-term growth trajectory.

“Key focus areas will be around whether or not this cut is the bottom and GM trends from here,” Muse said.

“So overall, while near-term demand dynamics will likely remain under pressure given a weakened consumer and macro uncertainties bleeding into enterprise spending, we believe that commentary will support intact secular growth drivers across all verticals, robust product cycles led by Hopper and Lovelace (and optionality from Grace?), and margin expansion moving forward,” Muse said.

Jefferies analyst Mark Lipacis, who has a buy rating and a $370 price target, said he feels this cut will be easier to buy than the previous one.

Lipacis said that the slide in data-center sales was supply-chain driven, and that not only were the total market in data-center leases at their highest on record, but that vacancies were at their lowest on record.

Of the 44 analysts who cover Nvidia, 34 have buy ratings, nine have hold ratings, 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.

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