Nvidia: a warning but solid trends

8 August Nvidia (“Wide Moat”) reported preliminary second quarter results with revenue of approximately $ 6.7 billion, well below management’s original forecast of $ 8.1 billion.

The main driver of the deficit was weakness in the gaming segment (down 44% sequentially and 33% yoy to $ 2 billion).

We had anticipated a slowdown in the gaming segment as a result of falling cryptocurrency prices and associated mining demand, as well as weaker macroeconomic conditions, and previously we had seen a sequential decline in game sales for the remainder of 2022.

The stock pulled out after the news and continues to trade at a slight discount from our unchanged fair value estimate of $ 200.

Entry point

We think Nvidia may have some tough quarters, which could create a more attractive entry point.

That said, we believe long-term investors may start to find Nvidia stocks attractive, as we expect the data center business to prove more resilient to macroeconomic headwinds.

Artificial intelligence and other cloud investments are expected to continue at high levels, and we believe Nvidia still benefits from strong exposure to these age-old trends among chip makers.

AMD (“Narrow Moat”), the main competitor in graphics processing units (GPUs), recently reported sales of weaker PC components and downsized its outlook for its GPU business.

Stock reduction

Over the past few months, we’ve seen numerous reports detailing excess GPU inventory as supply outpaced rapidly shrinking demand.

During the quarter, Nvidia also recorded a $ 1.32 billion charge for inventory write-downs.

The next generation of the company’s GeForce 40 series (Lovelace) GPUs is expected to be released later this year.

We suspect that much of the inventory devaluation for Nvidia was in the GeForce 30 (Ampere) GPUs.

Late 2018 cryptocurrency case

This sharp decline in game sales is very reminiscent of the last major cryptocurrency slump in late 2018, which led to several consecutive quarters of weak game sales for Nvidia.

We believe that a similar dynamic will occur this time too.

On the positive side, data center revenue was $ 3.8 billion, up 61% and above our expectations.

While we expect games to remain weak for at least the next few quarters, we reiterate our expectation that Nvidia’s data center segment will grow at least 40% this fiscal year.

We believe this business will increase every quarter throughout 2022 as customers like Microsoft (“Wide moat”), Amazon (“Wide moat”) e Alphabet (“Wide Moat”) are investing in Nvidia’s A100 processors for their internal and external workloads, such as natural language processing and recommendation engines, and how Meta-platforms (“Wide Moat”) is spending a lot to develop the necessary infrastructure for its metaverse offering.

© Morningstar, 2022 – The information contained herein is for educational purposes and provided for informational purposes ONLY. It is not intended and should not be construed as an invitation or encouragement to buy or sell listed securities. Any comment is the opinion of its author and should not be considered a personalized recommendation. The information contained in this document should not be the only source for making an investment decision. Be sure to contact a financial advisor or financial professional before making any investment decisions.

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