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Stock Analyst Update

Nvidia’s Warning Doesn’t Alter Our Long-Term Positive Outlook; Shares Undervalued

We had been anticipating a slowdown in the gaming segment following the crash in cryptocurrency prices and associated mining demand.

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On Aug. 8, Nvidia (NVDA) announced preliminary second-quarter results that included revenue of about $6.7 billion, well short of management’s 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, and we previously had gaming sales sequentially declining for the remainder of 2022.

The shares fell 7% following the news and continue to trade at a modest discount to our unchanged $200 fair value estimate. We think Nvidia could be due for a few challenging quarters, which could create a more attractive entry point. Nonetheless, we think long-term investors could find shares of wide-moat Nvidia beginning to look attractive, as we expect the firm’s data center business will prove more resilient to macroeconomic headwinds. Artificial intelligence and other cloud investments are poised to remain elevated, and we believe Nvidia still boasts strong exposure to these secular trends among chipmakers.

Graphics processing unit peer AMD recently reported weaker PC GPU sales and provided a softer outlook for its GPU business, and we have seen numerous reports in recent months detailing excess GPU inventories as supply overshot a rapidly declining demand environment. During the quarter, Nvidia also took a $1.32 billion charge on inventory reserves. With the firm’s next generation of GeForce 40 series GPUs (Lovelace) set to come out later this year, we suspect much of the inventory write-off was Nvidia clearing out excess GeForce 30 series (Ampere) GPUs. This sharp reduction in gaming sales is very reminiscent of the last major crypto crash in late 2018, which led to several consecutive quarters of weak gaming sales for Nvidia. We anticipate a similar dynamic to play out this time around as well.

Abhinav Davuluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.