Nvidia Near-Term Headwinds Don’t Discourage Positive Long-Term Outlook

Wide-moat Nvidia NVDA reported second-quarter results consistent with its preliminary results announced on Aug. 8, with revenue of $6.7 billion well short of the original guidance of $8.1 billion. The primary driver of the shortfall was weakness in the gaming segment (down 44% sequentially and 33% year over year to $2 billion). We had been anticipating a slowdown in the gaming segment following the crash in cryptocurrency prices and associated mining demand as well as weaker macroeconomic conditions. Shares fell about 5% during after-hours trading, which we attribute to weak guidance as gaming revenue is likely to be depressed for at least a few more quarters.

Although shares are trading at a discount to our unchanged $200 fair value estimate, we believe continued market volatility could create a more attractive entry point. Nonetheless, we think long-term investors should begin to find Nvidia attractive, as we think the firm’s data center business will prove more resilient to macroeconomic challenges. With artificial intelligence and cloud investments likely to remain strong, we believe Nvidia continues to boast enviable exposure to these secular trends among its peers.

Second-quarter sales grew 3%, but fell 19% sequentially to $6.7 billion. Partially offsetting the gaming decline was strength in data center and automotive segments. Data center sales grew 61% year over year led by hyperscale revenue that nearly doubled. Key workloads that supported this growth included natural language processing, deep recommendation engines, and autonomous vehicle fleet data processing and training. Gross margins were 43.5%, down from 65.5% in the first quarter due to a $1.34 billion charge on inventory reserves.

Management expects third-quarter sales to be at a midpoint of $5.9 billion, which implies a year over year decline of 17%. Sequential growth in data center and automotive segments is expected to be more than offset by declines in gaming.