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The Ratings Game: As Nvidia stock drops after record-breaking earnings, analyst wonders ‘What more can you ask for?’

Nvidia Corp. shares fell Thursday even as analysts praised the chip maker’s stellar results for the holiday quarter and widely expect the company’s data-center business to surpass gaming in sales.

Nvidia
NVDA,
-6.92%

reported double the profit it had from a year ago, broke new sales records, and provided a strong outlook amid supply-chain concerns on Wednesday. In response, Bernstein analyst Stacy Rasgon titled his note “What more can you ask for?”

“Once again Nvidia gives investors what they are presumably asking for, namely strong secular growth and a continued reason to dream,” Rasgon, who has an outperform rating and a $360 price target, said. “The company continues to benefit from two of their strongest product cycles in their history simultaneously as both their core gaming and datacenter segments overdeliver.”

Yet investors appeared to be asking for more, as shares dropped as much as 8.9% in Thursday morning trading, putting them on track for their worst one-day drop since Feb. 25, 2021, when they fell 8.2% after some on Wall Street nitpicked about data-center results amid then-record sales.

Analysts seemed to be more impressed, with at least six raising their price targets while only one lowered a target. Susquehanna Financial analyst Christopher Rolland said late Wednesday he was confused by the “muted after-hours reaction” of the stock, when it was down a mere 2%.

Rolland, who has a positive rating and a $360 price target, said perhaps investors were being “perhaps driven by less GM expansion and elevated opex,” but also remarked he thought the stock was already trading low compared with the sector.

Read: Nvidia seeks to lead gold rush into the metaverse with new AI tools

Beyond record profit and revenue, Nvidia reported adjusted gross margins of 67% and expects those to hold in the current quarter, while operating expenses were 22% higher than a year ago at $1.45 billion for the fourth quarter.

Those 67% margins, compared with Intel Corp.’s
INTC,
-0.93%

and Advanced Micro Devices Inc.’s
AMD,
-2.01%

margins in the low 50s, are the result of Nvidia’s large footprint in software, Colette Kress, Nvidia’s chief financial officer, told MarketWatch in an interview Wednesday evening. More than once during a conference call with analysts, Nvidia Chief Executive Jensen Huang stressed that the company is a “software-driven” business with such properties as Omniverse and its AI-enabled auto software.

Jefferies analyst Mark Lipacis, who has a buy rating and a $370 price target, said in a note that it’s this ecosystem that drives Nvidia’s moat.

“Nvidia Enterprise, Omniverse, and Drive were highlighted as the 3 programs to drive near-term software growth,” Lipacis said. “Future GPU consumption will be driven by Nvidia’s entrance into new applications and acceleration of new workloads, which is enabled by its ecosystem.”

“Despite the Arm deal falling through, we continue to believe that with its ecosystem of software, systems and chips, Nvidia is best positioned to capture 80% of the value of the Parallel Processing Era in the datacenter long term,” Lipacis said.

Data center sales, which are expected to lead growth in the current quarter, came in at $3.26 billion, for a 71% from a year ago, compared with gaming sales of $3.42 billion, up 37% from last year.

Susquehanna’s Rolland said that while gaming was a big driver in Nvidia’s holiday quarter, he expects data center sales to surpass gaming, which has only happened one time before a year and a half ago, calling it “a huge milestone for the company.”

With Nvidia’s Kress guiding data-center sales to accelerate like they did in the fourth quarter, a quick calculation shows that if gaming stays on track for 6% sequential growth and data center for 11% growth, both business segments would come in around $3.6 billion for the April-ending quarter.

For more: Look back at earnings results from Intel as well as AMD

Evercore ISI analyst C.J. Muse, who has an outperform rating and a $375 price target, also said he expects data center to become dominant.

“Data Center is now positioned to become the largest segment for Nvidia in FY23 with momentum still strong and no signs of growth abating – a very important milestone in our view,” Muse said.

Cowen analyst Matthew Ramsay, who has an outperform rating and a $350 price target, said he believes that Nvidia is even favoring its data center business given demand.

“We continue to believe given the near insatiable demand, the company is prioritizing its Datacenter customers, while Gaming supply remains tight, but improving,” Ramsay said.

Of the 43 analysts who cover Nvidia, 34 have buy ratings, seven have hold ratings and two have sell ratings. The average price target as of Wednesday morning was $347.63, compared with a previous $345.87, according to FactSet.

Over the past 12 months, Nvidia shares were up 67% through Wednesday’s close, while the PHLX Semiconductor Index 
SOX,
-2.38%

 rose 10% over that period, the S&P 500 index 
SPX,
-1.14%

 gained 13%, and the Nasdaq Composite Index 
COMP,
-1.68%

 fell less than 1%.

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