Earlier this week, NVIDIA (NASDAQ:NVDA) reported second-quarter results and issued a disappointing sales forecast for the third quarter. Still, shares managed to close 4% higher on Thursday after erasing an after-hours trading deficit.
Outlook Is What Concerns Investors
Nvidia reported Q2 adjusted EPS of $0.51, a far cry from the consensus estimates of $1.26 per share. Revenue reached $6.7 billion, missing the consensus projection of $8.1 billion.
The chipmaker reported a 33% drop to $2.04 billion in gaming department revenue compared to the year-ago period. The company says the decline comes from weak demand for its gaming products, particularly its popular graphic cards.
The company’s CFO, Colette Kress, said:
“Macroeconomic headwinds across the world drove a sudden slowdown in consumer demand.”
Nvidia’s data center unit performed somewhat better, with its revenue rising 61% year-over-year to $3.8 billion, driven by solid demand among major cloud providers. The company’s professional visualization unit, which develops enterprise graphics cards, saw a revenue drop of 4% from the year-ago period to $496 million.
The automotive business’ revenue grew 45% year-over-year to $220 million, while Nvidia’s crypto mining chip unit saw “nominal” revenue growth. The company said it took a $1.34 billion hit in the second quarter as its inventory grew while the company expected significantly stronger performance from its gaming and data center markets.
“I know the demand is strong, but we expected the demand to be even stronger,” said CEO Jensen Huang. He also said Nvidia faced supply chain headwinds that impeded sales, though demand “for GPUs in the cloud” remained strong.
He added:
“We were challenged this quarter with a fair amount of supply chain challenges.”
However, it gets trickier from here. Nvidia said it expects $5.9 billion in sales for the third quarter, down 17% year-over-year and widely missing the analysts’ estimates of $6.95 billion. However, the company expects strong data center and automotive performance to partially offset the declines.
Q2 De-Risked Earlier
Earlier this month, Nvidia de-risked Q2 expectations by releasing preliminary results. The chipmaker said it generated $6.7 billion in revenue, compared to its earlier guidance of $8.1 billion.
The weak pre-announcement was mostly driven by a 44% decline in the company’s Gaming unit. However, Kross said Nvidia’s long-term gross margin profile remained unaffected.
Kross said Nvidia reduced its operating expenses and redirected its investments towards long-term growth while maintaining near-term profitability. The company plans to continue buying back its stock as it expects to continue generating cash.
Nvidia’s pre-announcement came just a week after the U.S. government approved the $280 billion to boost microchip production.
Famous stock market investor Jim Cramer described Nvidia’s pre-announcement as a “clearing event.” Cramer acknowledged that the decline in Nvidia’s gaming market was concerning, but it also serves as a reminder that “gaming was very much a COVID phenomenon.” Cramer expects Nvidia will now be seen as an industrial and data center company.
Data Center Growth Vs. Gaming Slowdown
Given that the meaningful slowdown in gaming is already priced in shares (NVDA down 40% year to date), investors are focusing on the company’s biggest business by generating revenue - data centers. Strong data center performance is the key to unlocking the long-term bullish thesis for Nvidia.
Some analysts believe that Nvidia could continue facing issues emerging from slower growth in crypto-mining and data center areas. Summit Insight Group’s Kinngai Chan said:
“We think Nvidia may see further downside from the crypto-mining and data center end markets.”
Nvidia’s Huang also noted a substantial slowdown in Chinese cloud service providers’ infrastructure investment in the second quarter, though this had been counterbalanced by robust growth in the home market.
While Nvidia’s strong growth in the past two years has been mainly driven by its latest generation of graphics cards, which were particularly popular during the pandemic, it remains unclear whether the crypto mining market fueled that demand.
Earlier this year, the Santa Clara, California-based company said it reached a $5.5 million settlement with the U.S. Securities and Exchange Commission (SEC) about how it notified investors of how cryptocurrencies fueled the demand for its graphic processing units (GPUs) in 2017. The company has no more insight into how cryptocurrencies impact the demand for its offerings nowadays.
Nvidia’s CFO Colette Kress said the ongoing volatility in the crypto market “has in the past impacted, and can in the future impact, demand for our products and our ability to estimate it accurately.”
She added that the company is unable to assess the extent of the impact crypto mining had on its Gaming unit.
On the other hand, the data center overtook gaming as Nvidia’s biggest business earlier this year. Just like many of its industry peers, Nvidia is highly focused on tackling the rapidly-growing metaverse and opportunities that immersive worlds can bring.
While many may raise concerns over Nvidia’s Q2 results and short-term headwinds emerging from China lockdowns and the war in Ukraine, none of this should matter much for the chipmaker’s long-term prospects.
It is for a fact that Nvidia has incredibly strong gaming and data center businesses. In addition, the company also forayed into the general-purpose computing space with its “Grace” Arm server chips which are expected to boost its total addressable market.
Furthermore, the company also acquired networking solutions provider Mellanox (NASDAQ:MLNX), marking a strong addition to the company’s existing GPU and CPU compute engines.
In the first fiscal quarter, Nvidia’s data center unit generated $3.75 billion in sales, up 83.1% year-over-year, compared to the gaming division’s growth of just 31.2% to $3.62 billion. While the data center is now Nvidia’s top-performing business segment, it is difficult to say whether it will stay that way as a lot depends on the competition the chipmaker faces in these two respective markets, as well as Nvidia’s commitment to continue expanding its data center portfolio.
Jensen previously said Nvidia feels quite optimistic about the second half of 2022 for its data center business as “AI and data-driven machine learning techniques” remain “incredibly strategic to all the companies that we know. “
Summary
This week, Nvidia shares have been more volatile than usual after the chipmaker reported Q2 results and offered soft Q3 guidance. Still, investors are brushing away near-term concerns as they continue to bet the company will reap long-term benefits from its beaming data center business.