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Morningstar | Nvidia Calls For Return to Growth in 2Q, Though Cloud Demand Visibility Remains Limited

Nvidia reported first-quarter results consistent with our expectations. Management was pleased to see the reduction of inventory in the channel, which has plagued Nvidia since late 2018 due to the rapid decline in cryptocurrency-mining GPU demand. In data center, the firm is facing similar pauses in hyperscale spending as Intel, with the issue likely to persist into the second quarter. CFO Colette Kress provided full-year revenue guidance during last quarter’s call, with Nvidia’s top line slated to be flat to down slightly year over year. However, management’s second-quarter outlook is now lower than a few months ago, with Kress noting the firm will no longer provide guidance beyond one quarter. Taken together, we think revenue for the current fiscal year will be down in the mid-single digits, as data center visibility remains low and Intel’s CPU shortages will impact the initial ramp of Nvidia’s gaming laptops. We are maintaining our $120 fair value estimate for narrow-moat Nvidia, with shares appearing expensive at current levels.

First-quarter sales declined 31% year over year to $2.22 billion. Gaming sales fell 39% to $1 billion, primarily due to the aforementioned inventory issues. Kress noted during last quarter that Nvidia’s normalized quarterly gaming revenue run rate is about $1.4 billion. Based on Kress’s guidance, we don’t expect the firm to return to that run rate until the third quarter. Data center revenue was $634 million, down 7% sequentially and 10% year over year. One bright spot was Nvidia’s T4 GPUs for inference, with a double-digit percent contribution to data center sales. While key hyperscalers such as Amazon, Alibaba, Google, Baidu, and Tencent have all adopted the T4 in their data centers, we continue to expect a fragmented inference chip market, with FPGAs, ASICs, and even CPUs also being prominent.

Gross margins were 58.4% for the quarter, down 610 basis points year over year due to lower GPU volume and a less favorable overall product mix. Management expects second-quarter revenue to be up 15% sequentially to $2.55 billion led by gaming.

With AMD set to launch 7-nm gaming GPUs in the coming weeks (and Nvidia remaining on TSMC’s 12-nm process), investors may envision market share loss or pricing pressure for Nvidia (as they do for Intel). Although we do assume share gains for AMD in the coming quarters, we continue to expect both Intel and Nvidia to retain the high-end of their strongholds, as more advanced process technology does not guarantee better performing processors. CEO Jen-Hsun Huang stressed Nvidia’s superior performance at every price point for its Turing GPUs versus competition and is unconvinced that AMD’s upcoming Navi GPUs will be much of a threat. All in, we will be eagerly awaiting performance benchmark data in the coming months to see how competitive AMD really has become.