Jhe drop in semiconductor stocks continues to deepen, leaving many investors wondering when the decline will end. Although Nvidia (NVDA) has executed perfection over the past two years, it has not been immune to the macroeconomic and supply chain headwinds that led to the recent punishment for tech stocks. But is this now a buying opportunity?
The semiconductor specialist will release results for the first quarter of fiscal 2022 after the closing bell on Wednesday. While twelve straight quarters of earnings beatings have made investors less concerned about Nvidia’s valuation, the market is nonetheless repricing the technology, which has driven NVDA stock to a six-month low and is now down around 50% since the beginning of the year. Much of this decline was also the result of the canceled takeover deal Nvidia had on the table for Arm Limited after the company cited “significant regulatory challenges”.
The deal would have given Nvidia control of designs that rival chip companies such as Intel (INTC) and AMD (AMD) and Qualcomm (QCOM) rely on to develop their own competing chips. Investors now fear that Nvidia’s growth capabilities in key graphics card markets, especially those used in video games and data centers, are under pressure. The recent sale of cryptocurrencies has also reduced the demand for Nvidia GPUs which are used in crypto mining.
Incidentally, the entire chip industry has also suffered a drop in average selling prices, which analysts say will impact the company’s gaming and data center revenue. After posting sequential revenue growth in each of its last 12 quarters, the data center business is Nvidia’s second largest growth driver. To reverse the stock’s decline, the company will have to speak positively about its growth prospects for the next quarter and beyond on Wednesday.
For the three months ending in April, Wall Street expects the Santa Clara, Calif.-based company to earn $1.29 a share on revenue of $8.09 billion. That compares to the year-ago quarter when earnings were 92 cents per share on revenue of $5.66 billion. For the full year, ending in January, earnings of $5.65 per share would increase 27% year over year, while annual revenue of $34.8 billion would increase by 30% year over year.
For some context as to the stock’s recent downtrend, the projected full-year earnings growth of 27%, while solid on its own, compares to earnings growth of 72% a year ago. Similarly, projected 30% full-year revenue growth is down from 60% growth in fiscal 2021. In other words, Nvidia is a victim of its own success and faces difficult year-to-year comparisons. And it’s the same story across the tech sector as a whole that has benefited from a massive surge from the pandemic.
The market wants to see how Nvidia management plans to pivot. The company’s dominance in its current market remains key to its growth, as evidenced by fourth quarter results in which the company earned $1.32 per share on $7.64 billion in revenue, beating out the both metrics driven by record gaming, data center and professional visualization revenues. Gaming revenue rose 37% to $3.42 billion, while data center revenue jumped 71% to $3.26 billion. These accounted for 43% of total revenue.
The company expects first-quarter revenue to be $8.1 billion, plus or minus 2%. This orientation caused the stock to fall by more than 10%. The market assumes that the number of data centers for the quarter just ended will slow considerably and that the forecast forecast may not be good enough to excite investors. As such, Wednesday’s direction will be the key factor in the stock’s near-term direction.
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