Demand Headwinds Finally Catch Up to Nvidia; Shares Look Attractive

Wide-moat Nvidia reported first-quarter results that came in ahead of our expectations. Gaming and data center segments remained the primary growth drivers. However, management noted second-quarter revenue will be negatively affected by $500 million to account for COVID-19 lockdowns in China and the stopping of sales to Russia. Amidst the broader technology sector selloff, shares of Nvidia are down 44% year-to-date, and now trade at a discount to our unchanged fair value estimate of $200 per share. Gaming revenue is expected to decline sequentially in the second quarter, as: demand softens in Europe (related to the war in Ukraine) and China (as a result of lockdowns); channel inventory has nearly normalized; and the firm transitions to a new GPU architecture. We note this is consistent with our growth assumptions for the gaming segment this year. Despite near-term headwinds, we view Nvidia as our top fabless semiconductor pick, as we think the firm’s data center business will prove resilient to macroeconomic headwinds.

We are lowering our fair value uncertainty rating to high from very high, as we now have more confidence in the range of outcomes for our valuation assumptions. Specifically, the data center segment surpassed the gaming segment as a percentage of sales during this quarter, and we expect this dynamic to persist. We think Nvidia’s data center business is the chief driver of its wide moat. With metaverse, AI, and other cloud investments poised to remain elevated, we believe Nvidia boasts the best exposure to these secular trends among chipmakers.

First-quarter sales grew 46% year over year to $8.3 billion, with gaming and data center revenue up 31% and 83%, respectively. In the data center segment, hyperscale and cloud sales more than doubled year over year. Data center revenue from vertical industries also grew a strong double-digit percentage year over year, led by consumer internet companies, financial services, and telecom.