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Aug. 14, 2019, 2:51 p.m. EDT

Nvidia earnings: The bar for data-center sales may not be low enough

Impressive growth has slowed considerably in chip maker’s second-largest segment

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By Wallace Witkowski, MarketWatch


Wallace Witkowski/MarketWatch
Nvidia Chief Executive Jensen Huang gives the keynote address of the 2019 GTC Conference in San Jose, Calif., on March 18.

Nvidia Corp. may face problems overcoming high expectations in its data-center business amid the release of new gaming cards, and that could hurt the stock as investors focus on the chip maker’s second-largest business rather than its core business.

Nvidia /zigman2/quotes/200467500/composite NVDA -1.96%  is scheduled to report second-quarter results on Thursday. Even as Nvidia releases new gaming chips to compete with upstart Advanced Micro Devices Inc. /zigman2/quotes/208144392/composite AMD -0.55% , the company is going to have to contend with weak data-center sales that it forecast during its last earnings report.

But some analysts think expectations are too high. The Wall Street consensus forecast for data-center revenue has declined to $668.5 million, or 12% off sales from a year ago, compared with the $725.6 million forecast before the weak outlook.

Bernstein analyst Stacy Rasgon, who has a market-perform rating and a $150 price target, said the Street seems to be expecting too much out of data-center sales.

Rasgon said “we believe Street estimates for data-center appear very aggressive with strong sequential growth beginning in FQ3 (up by >$120M QoQ and above prior peak levels, which itself was inflated), potentially challenging in the current environment which may not prove to be hugely supportive.”

“Additionally, we are surprised that consensus estimates into next year barely came down following the removal of full-year guidance last quarter,” Rasgon said.

“Street numbers remain a high bar, but data center recovery is the most important dynamic that could cause investors to look through gaming risks,” said Morgan Stanley analyst Joseph Moore, who has an equal weight rating on Nvidia.

Moore said data-center “is the most important driver of the multiple; we take it on faith that this business will rebound as cloud spending starts to recover, but haven’t seen direct evidence of that yet; this quarter will be key.”

What to expect

Earnings: Analysts surveyed by FactSet, Nvidia on average is expected to post adjusted earnings of $1.15 a share, up from the 92 cents a share expected at the beginning of the quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $1.15 a share.

Revenue: Wall Street expects Nvidia revenue to decline 18% to $2.55 billion from a year ago, according to 28 analysts polled by FactSet. That’s down from the $2.56 billion forecast at the beginning of the quarter. Nvidia predicted revenue of $2.5 billion to $2.6 billion. Estimize expects revenue of $2.54 billion.

Revenue from gaming, Nvidia’s largest business, is expected to decline nearly 28% to $1.3 billion.

Stock movement: Nvidia shares are down 6.7% since the company’s last earnings report. In comparison, the PHLX Semiconductor Index /zigman2/quotes/210598361/realtime SOX -1.06% rose 0.8%, the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.39% declined 1%, and the tech-heavy Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.83% shed 1.5%.

Of the 37 analysts who cover Nvidia, 25 have buy or overweight ratings, nine have hold ratings and three have sell or underweight ratings, with an average price target of $183.03, according to FactSet data.

/zigman2/quotes/200467500/composite NVDA 190.49, -3.80, -1.96%

What to expect in the call

Instinet’s David Wong said Nvidia’s “impressive run” data-center growth appears to have stalled.

“With data-center (GPU) sales growing just 4% QoQ in the October 2018 quarter, then falling 14% sequentially in the January 2019 quarter and a further 7% QoQ in the April 2019 quarter (April 2019 down 10% YoY), we expect another YoY decline in data-center segment revenues in the July 2019 quarter and possibly again in the October 2019 quarter,” Wong said in a note.

Susquehanna Financial analyst Christopher Rolland, who has a positive rating and a $190 price target on Nvidia, said the data-center market is not re-accelerating yet.

“While beats are unlikely, NVDA results may be ‘better than feared’?” Rolland said. “Our intra quarter datacenter checks weren’t great, as orders for GPU servers and AI ASIC systems remain under pressure.”

On the other hand, Mizuho analyst Vijay Rakesh, who has a buy rating and a $192 price target, said while valuations on the stock are steep, “we believe current Street estimates are conservative, so that improving PCs, AI deep learning and inferencing markets, gaming trends, automotive and data-center position for upside to estimates.”

Oppenheimer analyst Rick Schafer, who has an outperform rating and a $190 price target sees inference as a bright spot in data center sales. Inference is a component of an AI system that applies logical rules to known data and deduces new information.

“Bears view slowdown as secular shift (training to inference), but we view the slowdown resulting from a broader pause in hyperscale spending,” Schafer said. “NVDA dominates training and is rapidly taking share in inference. We expect DC up Q/Q in F2Q, and a 2H snapback.”

/zigman2/quotes/200467500/composite
US : U.S.: Nasdaq
$ 190.49
-3.80 -1.96%
Volume: 7.69M
Oct. 18, 2019 4:00p
P/E Ratio
43.04
Dividend Yield
0.34%
Market Cap
$116.01 billion
Rev. per Employee
$882,428
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/zigman2/quotes/208144392/composite
US : U.S.: Nasdaq
$ 30.97
-0.17 -0.55%
Volume: 39.71M
Oct. 18, 2019 4:00p
P/E Ratio
175.77
Dividend Yield
N/A
Market Cap
$33.62 billion
Rev. per Employee
$641,089
loading...
/zigman2/quotes/210598361/realtime
US : Nasdaq
1,590.09
-17.07 -1.06%
Volume: 149,310
Oct. 18, 2019 5:16p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
2,986.20
-11.75 -0.39%
Volume: 1.99B
Oct. 18, 2019 5:08p
loading...
/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
8,089.54
-67.31 -0.83%
Volume: 1.82M
Oct. 18, 2019 5:16p
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Wallace Witkowski is a MarketWatch news editor in San Francisco. Follow him on Twitter @wmwitkowski.

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