Nvidia’s big reset has analysts wondering whether company is now in the clear

Nvidia Corp. delivered an outlook for the latest quarter that was far lower than what analysts were expecting, as the chip company deals with a bevy of challenges including waning demand for its gaming and professional-visualization products, macroeconomic pressures on spending, and supply-chain disruptions.

Nvidia
NVDA,
+4.01%
shares fell as much as 2% in early trading Thursday, but then turned higher, last up 3% compared with a less than 1% gain on the S&P 500 index
SPX,
+1.41%.

The company’s downbeat revenue forecast, which came in nearly $1 billion shy of the FactSet consensus, wasn’t particularly surprising on Wall Street, seeing as Nvidia had already telegraphed its challenges in gaming when it preannounced a sharp revenue miss for the latest quarter earlier in August.

But while analysts weren’t optimistic headed into Nvidia’s most recent report, questions now turn to the future. Specifically, a key debate on Wall Street concerns whether Nvidia’s stock has been “de-risked,” or made safe again, after management’s moves to realign expectations.

“We feel like the October quarter should mark the revenue bottom for Nvidia,” Piper Sandler analyst Harsh Kumar wrote in a note to clients.

He highlighted that Nvidia seems to be “taking the tough medicine in gaming” but that its management team expects a normalization in gaming inventory by year-end.

“We truly believe Nvidia’s data center business should normalize shortly, while gaming growth should start next year,” Kumar wrote. “These trends, along with the AI and Omniverse momentum, keep us optimistic about the future.”

He has an overweight rating and $235 price target on the shares.

Opinion: Nvidia has faced this type of downturn before, and seems to have a specific goal in mind this time

Cowen & Co.’s Matthew Ramsay, however, expressed a bit more caution on the overall picture.

“Gaming inventory/crypto correction painful but necessary and welcome,” he wrote. “However, despite strong upcoming Lovelace and Hopper product launches in Gaming and Datacenter, respectively, we left tonight’s call with the same feeling as we entered it…just enough nitpick doubts in Datacenter to prevent the ‘all clear’ for the stock.”

Ramsay noted that it wasn’t particularly shocking to see Nvidia take inventory write-downs for the gaming business, though he wasn’t expecting the company to do so in the data-center business as well.

“The inclusion of Datacenter inventory write-downs came as a surprise, particularly when combined with supply chain issues resulting in a push-pull in customer order patterns and deliveries,” Ramsay wrote. “Management attributed this to a material reduction in China hyperscale spend given macro conditions, exacerbated by kitting issues, especially in networking…that negatively impacted the company’s ability to fully ship to demand.”

He maintained an outperform rating and $200 price target on the stock, which has fallen 41% so far this year as the S&P 500 has lost 13%.

Evercore ISI analysts C.J. Muse, who has an outperform rating and a $225 price target, said he was also surprised at the data-center write-downs and that the report was “quite reminiscent of investor consternation in the first 8-9 months of 2019 (shares flat) which then turned to enormous outperformance (+200% over next 5 Q’s) as shares climbed the wall of worry into 4Q19 and all of 2020 led by meaningful 7nm data-center and gaming product cycles.”

“Put it all together and led by expectation for renewed acceleration in topline driving positive earnings momentum, we see potential for a repeat of 4Q19-4Q20 into 2023,” Muse said.

Citi Research analyst Atif Malik, who has a buy rating and a $248 target price, said Nvidia “remains a data-center story with major auto inflection next year.”

“While investors would have liked Nvidia to guide down on data center to de-risk potential macro-related enterprise weakness, we expect gaming sequential growth to resume in the Jan-Q as Nvidia comes out of inventory correction post channel clearing ahead of the new Ada Lovelace product.”

Bernstein analyst Stacy Rasgon, who has an outperform rating and a $210 price target, said investors expected the third-quarter forecast to be ugly after the warning in early August.

“While the results were a bit breathtaking (and not in a good way), we don’t think we necessarily hate the way this is turning out,” Rasgon said. “It is clear the company is undershipping gaming by a substantial amount. Datacenter is holding in well with China de-risked. Automotive is inflecting. We should never have to worry about a crypto cycle ever again. And as the dust settles we have two brand-new product cycles set to kick off within the next quarter or two.”

Of the 44 analysts who cover Nvidia, 34 have buy-grade ratings, 9 have hold ratings and one has a sell rating, with an average price target of $227.12.

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