After more than a year of quarterly revenue declines, Nvidia Corp. is finally expected to return to growth just before potentially announcing its next round of new products with many analyst seeing a potential short-term headwind in gaming because of the COVID-19 coronavirus outbreak balanced out by strong data-center trends.
Nvidia NVDA, +1.34% is scheduled to report earnings after the close of markets on Thursday, and revenue is expected to increase for the first time in more than a year. Nvidia’s largest segment, gaming, and the business that has seemed most important to investors in recent years, data-center chips, are expected to drive the growth.
Data-center sales have been one of the most widely watched sectors in the chip industry this earnings season, after a decline in infrastructure sales in 2019 led to doubts about the cloud boom. Earlier in earnings season, Intel Corp. INTC, +0.16% reported a surprise jump in its data-center sales, while Advanced Micro Devices Inc. AMD, +0.22% reported that data-center sales were strong even though those results were masked by being lumped together with poor console sales.
Read: The problem with AMD’s data-center business
Reporting after those two rivals means the bar has been raised for Nvidia. Instinet analyst David Wong, who has a hold rating and a $147 price target on Nvidia, expects data-center sales growth to be strong, but only against the “easy” comparisons of last year’s disappointment.
“We continue to think that its GPU products might only address a portion of the data center processor/accelerator market,” Wong said. “We will be interested to see if Nvidia will be able to demonstrate superior year-over-year growth in its data center segment when the comparisons become more difficult, beginning in the October 2020 quarter.”
What to expect
Earnings: Of the 31 analysts surveyed by FactSet, Nvidia on average is expected to post adjusted earnings of $1.67 a share, up from 92 cents a share in the year-ago quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $1.70 a share.
Revenue: Wall Street expects Nvidia to return to its first quarterly revenue gain after four straight quarters of declines with revenue of $2.96 billion from Nvidia, according to 32 analysts polled by FactSet. That’s down from the $3.06 billion forecast at the beginning of the quarter, but up from the $2.21 billion reported in the year-ago quarter. Estimize expects revenue of $2.99 billion.
Revenue from gaming, Nvidia’s largest business, is expected to rise 59% to $1.53 billion, while data-center revenue is expected to rise 21% to $824.9 million, according to FactSet data..
Stock movement: Nvidia shares have gained nearly 30% since the company’s last earnings report in mid-November. In comparison, the S&P 500 index SPX, +0.43% has gained 9%, the tech-heavy Nasdaq Composite Index COMP, +0.71% has grown 15%, and the PHLX Semiconductor Index SOX, +1.35% has increased 13% in that time.
What analysts are saying
Jefferies analyst Mark Lipacis, who has a buy rating and a $315 price target, pointed to recent earnings reports from large public cloud providers as proof that data-center sales were on the upswing.
“Google GOOGL, +0.28% GOOG, +0.37%, Microsoft MSFT, -0.02% and Facebook FB, +1.69% expect strength in capital spending to continue into 2020, and Google noted a focus on machine learning and a shift to equipment from facilities,” Lipacis said. “This is consistent with NVDA’s commentary at CES suggesting strength in DC revenues in 4Q19 and 1Q20.”
Morgan Stanley analyst Joseph Moore, who has an overweight rating on Nvidia, said he expects a strong quarter and outlook in the gaming, even though COVID-19, what the World Health Organization has named the coronavirus, may result in some “marginal conservatism” and data-center segments.
“The most important dynamic will be demand trends in the HPC/cloud trend, which we expect to remain robust through the year,” Moore said, noting that cloud spending is showing digns of recovery and that some of the “largest cloud customers are talking about ‘conversational AI’ transformers as a breakthrough technology, requiring a high level of spending on both training and inference.”
Oppenheimer analyst Rick Schafer, who has an outperform rating and a $300 price target, said that COVID-19 posed a “near-term wildcard” for gaming, while AI accelerator growth and a recovery in hyperscale spending would drive data-center.
“We expect a fairly upbeat tone from the company during the call, particularly as the company should be among the primary beneficiaries of a renewed spending by the datacenter market,” said Ambrish Srivastava, BMO Capital analyst, in a note.
Benchmark analyst Ruben Roy, who has a buy rating and a $275 price target, said he also sees strong data-center trends and expects a conservative gaming outlook due to COVID-19.
“While we believe that the Gaming segment declined given typical 4Q seasonality, we believe that trends were modestly above management expectations,” Roy said. “While management could provide conservative 1Q guidance (Coronavirus/China exposure), we continue to believe that NVDA is well positioned to deliver significantly improved operating metrics in fiscal 2021 relative to fiscal 2020.”
COVID-19 may also affect the chip industry in another way, conference attendance, said Mizuho analyst Vijay Rakesh in a note.
“Many semiconductor companies appear to be cutting back on travel (even to the [Mobile World Congress in Barcelona on Feb. 24-27]) mostly from an abundance of caution with the Coronavirus,” Rakesh said. In fact, with so many companies dropping out, MWC may not even happen.
That could give an idea as to the expected attendance at Nvidia’s own annual GTC conference in San Jose, Calif., March 23 to March 26, at which new products are expected to be announced.
Bernstein analyst Stacy Rasgon, who has a market perform rating and a $225 price target, similarly noted the COVID-19 headwind for gaming and likely strength in data-center, but thinks valuations are too high in the run-up to GTC.
“We are not fundamentally negative on the name, but with numbers that we still believe might be a touch too high, and with potential coronavirus pressures, we might prefer a slightly better entry point,” Rasgon said.
Wells Fargo analyst Aaron Rakers, who has an overweight rating and a $270 price target, told investors to expect a “meaningful” data-center refresh at Nvidia’s GTC conference, based on plans for an upgrade to Indiana University’s “Big Red 200” supercomputer.
Rakers said that refresh is notable “as it points to a meaningful NVIDIA data center GPU refresh (7nm Ampere) coming in late-March at NVIDIA’s GTC — new Big Red 200 expected to incorporate NVIDIA’s next-gen GPUs in the summer time frame; pointing to a 70%+ performance increase versus the current-generation V100 GPUs.”
Of the 39 analysts who cover Nvidia, 28 have buy or overweight ratings, nine have hold ratings and two have sell or underweight ratings, with an average price target of $261.13.
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