Nvidia Q3 Earnings Show Sales Beat Management’s Guidance; Stock Undervalued

Nvidia Stock at a Glance

• Current Morningstar Fair Value Estimate: $200
• Nvidia Stock Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Positive

Nvidia Earnings Update

Wide-moat Nvidia (NVDA) reported third-quarter sales slightly ahead of management’s guidance, with gaming modestly ahead of our expectations, whereas the data center segment was negatively affected by the recent U.S. government export restrictions on certain products (A100 and H100 data center graphics processing units) to China. The gaming segment remains challenged following the crash in cryptocurrency prices and associated mining demand for GPUs in addition to weaker macroeconomic conditions and COVID-19 lockdowns in China. Shares are trading at a discount to our unchanged $200 fair value estimate, and we think long-term investors should find Nvidia attractive, as we believe the firm’s data center business will prove more resilient to macroeconomic challenges.

Third-quarter sales declined 17% year over year and 12% sequentially to $5.9 billion. Gaming sales fell 51% year over year and 23% sequentially to $1.6 billion. Data center sales of $3.8 billion grew 31% year over year led by U.S. cloud strength, but only 1% sequentially due to weaker demand in China and the export controls. Gross margins were 53.6% (versus guidance of 62.4%) and were negatively affected by a $702 million inventory charge related to lower data center demand in China. Management expects fourth-quarter sales to be at a midpoint of $6 billion, which implies a year-over-year decline of 22%, and a rebound in gross margins to 63.2%.

In early November, the firm began selling a new data center GPU, the A800, that has performance characteristics below the threshold specified by the restrictions. While the A800 will allow Nvidia to continue to sell to China’s hyperscale customers for at least a little while longer, we expect the performance limits set by the export restrictions to limit Nvidia’s future sales of more advanced products such as the latest H100 GPU into China. We continue to view Nvidia’s data center segment favorably despite the risks to its China sales.