Nvidia's had quite the rollercoaster year. Despite bouncing from the lows over the past month, the chipmaker's share price is down by over 44% so far in 2022. The company reports earnings this week. Can the figures further fuel the rally? Nvidia is Skilling’s stock of the week.
Slowing PC demand has been a big headwind for chip companies like Nvidia. Last month we put the spotlight on Intel and their plans to cut jobs in an effort to bring capacity more into line with demand. The Canalys report noted that:
“Adverse macroeconomic and industry factors including high inflation, rising interest rates and bloated channel inventories have dented the PC market’s momentum, and are likely to persist into 2023.”
Another concern is the recent commentary from Microsoft and Amazon that data centre growth is slowing. According to Nvidia's most recent earnings statement, data centre revenues now account for 57% of the total, up from 41% the previous year.
If Nvidia’s two key revenue drivers (data centre and PC) are slowing, could there be further downside ahead?
CFO Colette Kress laid out expectations after the prior quarterly report:
“Revenue is expected to be $5.90 billion, plus or minus 2%. Gaming and Professional Visualization revenue are expected to decline sequentially, as OEMs and channel partners reduce inventory levels to align with current levels of demand and prepare for our new product generation.”
“We expect that decline to be partially offset by sequential growth in Data Center and Automotive.”
Fair to say that expectations are being managed? Of course, this is unlikely to matter if the overall results disappoint. Revenues are revenues, and bills still need to be paid. Likewise, there’s a possibility that the company has managed to guide expectations low enough to beat.
The elephant in the room: China
Nvidia’s exposure to China is a key risk, especially after the Biden administration imposed export controls on advanced chip exports to the world’s second largest economy. Nvidia originates approximately 25% of their sales in the Chinese market.
However, Nvidia believe they can comply, while still offering advanced chips that meet the export rules, with a spokesperson telling Reuters:
"The Nvidia A800 GPU, which went into production in Q3, is another alternative product to the Nvidia A100 GPU for customers in China. The A800 meets the U.S. Government’s clear test for reduced export control and cannot be programmed to exceed it"
The key seems to be the lower transfer rate, with the A800 offering a chip-to-chip data transfer rate of 400 gigabytes per second, down from 600 gigabytes per second on the A100. The export rules restrict transfer rates of 600 gigabytes and above.
All in all, there are challenges on multiple fronts for Nvidia. The slowing demand for consumer electronic goods in the global economy, and signs of a peak in the data centre growth rate are both major challenges, as are the trade restrictions between the two major economies.
Quarterly revenues are expected at approximately $5.79bln, with $0.70 quarterly earnings per share, according to Newsquawk.
Nvidia is scheduled to report results after the close on Wednesday November 16th.
Not investment advice. Past performance does not guarantee or predict future performance.
