Nvidia’s data center sales may eclipse gaming – maybe that’s not a good thing

Data center sales from Nvidia Corp. is expected to outpace its game sales in fiscal first-quarter results as demand from server farms remains high and interest in games has waned from the rabid levels of the onset of the COVID-19 pandemic.

NVIDIA NVDA,
-2.51%
is due to release its financial results after the closing bell on Wednesday. Analysts polled by FactSet expect Nvidia’s data center sales to hit $3.58 billion, a 75% gain from the year-ago quarter, in what should be only the second time in company history that data center sales have exceeded gaming sales.

Analysts expect game sales of $3.46 billion. Last quarter, Colette Kress, Nvidia’s chief financial officer, predicted an acceleration in data center growth in the first quarter, following a fourth quarter where data center sales jumped 71% year-on-year. another to hit a record $3.26 billion.

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The earnings season so far has shown solid gains for server chips. Intel Corp. INTC,
-0.86%
doubled its full-year outlook as data center revenue grew 22% to $6 billion, and Advanced Micro Devices Inc. AMD,
-3.28%
posted its first quarter of over $5 billion and guided for its first period of over $6 billion.

Data center accounts for a “low 20%” of AMD’s enterprise, embedded and semi-custom chips unit – which includes data center and game console revenue. It jumped 88 % to $2.5 billion from a year ago. Sales will become more transparent as the company finally begins to break down data center sales into its own segment.

While AMD and Nvidia battle for shares in server CPUs, Nvidia dominates in its role as an accelerator for data centers. Jefferies analyst Mark Lipacis, who has a buy rating and price target of $370 on Nvidia, says the chipmaker “dominates dedicated accelerator instances with around 80% share” of sales. from the data center.

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Following the results from Intel, AMD and others, Evercore analyst CJ Muse, who has an overweight rating and $300 price target on Nvidia, said data center products are facing to “robust demand trends that should drive very strong growth over the next few quarters. Demand, however, hardly seemed to be a problem; it is rather the difficulties of supply and the ever-increasing obstacles that are the problems.

Investors will be looking for similar issues at Cisco Systems Inc. CSCO,
+2.92%,
which announced its earnings last week. Cisco – which has a quarter ending in April like Nvidia – noted it was misrepresented after Chinese authorities locked down Shanghai from March 27 and threw a wrench in Cisco’s ability to obtain components . As a result, Cisco issued a poor outlook and stocks had their worst day in over a decade.

What to expect

Earnings: Of 39 analysts polled by FactSet, Nvidia is expected to average adjusted earnings of $1.30 per share, down from 92 cents per share a year ago and $1.19 per share expected at the start of the quarter. All numbers are adjusted for last year’s 4-to-1 stock split.

Revenue: Wall Street expects revenue of $8.12 billion from Nvidia, according to 36 analysts polled by FactSet. This represents an increase from the $5.66 billion announced by Nvidia in the prior year quarter and the $7.28 billion forecast at the start of the quarter. In its latest earnings report, Nvidia forecast $7.94 billion to $8.26 billion.

Movement of stock: During Nvidia’s first quarter, or late April, shares fell 25%, while the PHLX Semiconductor Index SOX,
-0.27%
fell 17% during this period. Meanwhile, the S&P 500 SPX index,
+0.01%
lost 8.5%, while the Nasdaq Composite Index COMP,
-0.30%
fell 13%. On November 29, Nvidia stock closed at an all-time high of $333.76 and has since fallen 50%.

Nvidia has consistently exceeded analysts’ earnings estimates over the past five years and has beaten Street’s revenue estimates for 12 consecutive quarters. Shares fell 7.6% the day after last quarter’s report, despite the beating in earnings. Typically, the stock’s move has been mixed in the middle of the beat chain.

What analysts say

Oppenheimer analyst Rick Schafer, who has an outperform rating and a price target of $300, said Nvidia will likely strengthen its leadership in data centers as its new H100 chip ramps up to third. trimester.

“Demand continues to outstrip supply, although constraints should ease in 2H,” Shafer said. “Nextgen Ada Lovelace performance gaming GPU is expected in Q3. Our long-term thesis remains intact, as NVDA’s leading game and AI accelerator franchises remain positioned for outsized structural growth.

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Wedbush analyst Matt Bryson, who has a neutral rating and a price target of $190, said any downside for Nvidia “is necessarily primarily related to gaming revenue.”

“For gaming, falling secondary market prices and improving retail availability are among the signals that demand for GPUs is finally slowing,” Bryson said. “While such a result makes sense, especially with the speed of Ethereum hash additions declining, the specific impact on Nvidia is difficult to quantify given many variables.”

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Susquehanna Financial analyst Christopher Rolland, who has a positive rating and a price target of $320, agreed in a Wednesday note that “any significant beat and rise may be capped by the headwinds of the game.”

“For games, we note retail premiums above MSRP for Nvidia cards have fallen precipitously, from a high of +130% in mid-2021 to +78% in January and just 23% today,” Rolland said. “Coinciding with these price cuts, we’ve also seen significant restocking, with all major card families now available at retailers.”

Of the 45 analysts who cover Nvidia, 37 have buy ratings, seven have hold ratings and one has a sell rating, with the stock trading 48% off the mid-price target of $319.95. .

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