Nvidia stock will be exclusively a data center story for the foreseeable future

Nvidia Corp. was based on video games, but at least for the rest of the year, investors and analysts won’t be looking at games when pricing the stock.

Nvidia NVDA,
-4.57%
cut its second-quarter revenue forecast by $1.4 billion earlier this month, revealing that gaming revenue would fall more than 30% from last year as a lack of supply for gaming cards quickly turned into in oversupply amid the “crypto winter” and retreat to pandemic booms in gaming and PC sales. Analysts now expect data center and gaming sales – which have battled for revenue supremacy among Nvidia’s divisions in recent years – to show a severe sales split, with data center taking the lead.

That’s why sustaining growth in data center sales is so important to Nvidia’s stock performance over 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 dollars, according to FactSet.

“While the business is not at risk at this point due to gaming weakness, there is still some uncertainty around the 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.

Reading: Chip stocks rose as pandemic demand for electronics fell, but there were still some winners

Data center layoffs hit Intel Corp. INTC,
-4.35%
this earnings season and Advanced Micro Devices Inc. AMD,
-3.24%
The results showed some growth concerns (compared to strong results in previous quarters), and Nvidia could break that tie with its data center forecasts.

“Now it depends on how they guide,” Mizuho’s Jordan Klein wrote in a recent note. “The data center is holding, but you fear it’s the next shoe to drop. “

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

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

“However, we have a feeling that the market side would really like to see a further risk-free FQ3 outlook, which could create a solid setup for next year, as the cut in gaming looks very much like the latest boom in end of 2019, the upcoming product roadmap looks much more favorable as new products (both in gaming and datacenter) should be here within the next quarter or two, unlike last time when new product cycles were 18 months away,” Rasgon wrote.

Last quarter, Nvidia’s earnings report mirrored Cisco Systems Inc’s CSCO.
-2.03%
as Cisco faced many of the same supply chain issues it faced when the Chinese shut down Shanghai in March due to the COVID outbreaks. Nvidia may be hoping that’s still the case, as Cisco expects revenue to pick up as supply chain woes ease.

What to expect

Profits: Of the 27 analysts surveyed 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 the $1.25 per share reported last year. expected at the beginning 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 forecasts of $8.12 billion at the start of the quarter.

Stock movement: During the second quarter, or the end of July, Nvidia shares fell 2%, while the PHLX Semiconductor SOX Index,
-3.72%
slipped 1.6% over the same period. Meanwhile, the S&P 500 SPX,
-2.14%
was stable, while the Nasdaq Composite Index COMP,
-2.55%
fell 0.5%. On Nov. 29, Nvidia stock closed at an all-time high of $333.76 and has since fallen 49%.

What the analysts say

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

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

“Overall, while near-term demand dynamics will likely remain under pressure given subdued consumer and macroeconomic uncertainty bleeding into business spending, we believe the commentary will support intact drivers of secular growth across industries, strong product cycles led by Hopper and Lovelace (and optional from Grace?), and margin expansion forward,” Muse said.

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

Lipacis said the slide in data center sales was driven by the supply chain, and that not only was the overall market for data center leases at an all-time high, but vacancies were 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 the data of FactSet.

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