Can Nvidia’s [NVDA] share price rally from a revival of its data centre?

Nvidia Corporation [NVDA] released its Q4 earnings on 14 February, which revealed a steep fall in a number of areas such as revenue, GAAP earnings per share and net income. And yet the stock has remained resilient, jumping over 1% between Wednesday and Thursday closing ($152.89 to $154.53), and ending Friday on $157.34, an almost 3% increase overall. 

Nvidia’s stock has benefited from a degree of foresight, as it lowered its revenue guidance from $2.7bn to $2.2bn weeks ahead of its earnings release. For investors and traders, Nvidia’s core business remains profitable as the massive data usage needed for cloud computing services like Microsoft’s [MSFT] Azure and Amazon’s [AMZN] Web Services means Nvidia’s products will be needed en masse indefinitely.

Nvidia’s revenue dropped dramatically in Q4, coming in at $2.21bn, 24% lower than the $2.91bn achieved a year previous. The chip-maker’s net income and GAAP earnings per share were down 49% and 48% respectively, coming in at $567m and $0.92 respectively. At $158, its stock is 85% off its 52-week and all-time high of $292.76 but still way above its $124.46 low.Powered by CMC Markets, as at 26 February 2019

Console producers leave Nvidia out in the cold

A large portion of the decline can be attributed to the company’s gaming wing, with console producers no longer including Nvidia graphics processors in their contemporary models, although its sister product Tegra is used in the Nintendo Switch. The gaming segment contributed 45% of Nvidia’s total revenues in Q4, down from 55% in Q3 and 60% in the same quarter a year ago. 

Though the margins on games consoles aren’t what they were, and any brand awareness gained from the venture is small and specific among gamers, this has evidently hurt the coffers of the Santa Clara-based company. Its EPS was slightly ahead of consensus estimates of $0.75 at $0.92. 

The stock has been rated ‘overweight’ for months and is currently rated as ‘buy’ by several analysts. Nvidia’s P/E ratio of 24.08 remains an appetising investment compared to the sector average of 261.50 and its competitors, with Qualcomm’s [QCOM] 33.65 and Intel’s [INTC] 11.47.

What does this all mean? 

The experts are undecided. Bernstein’s Stacy Rasgon said that the company “tried to offer some solace” with its outlook and commentary, but he, like other commentators, are less sure about Nvidia’s ability to assuage fears of a worst-case scenario in the longer term due to its own assumptions about certain markets.

“Nvidia attempted to provide some visibility via a full-year revenue guide (flat to down slightly year-over-year),” he wrote in a note to clients. “But this implies gaming exiting the year hugely above the $1.4bn run-rate, and indeed, up significantly versus the peaks of last year even without the benefit of what was hundreds of millions of dollars’ worth of cryptocurrency/channel fill, bringing risk of downward revisions as we move through the year.”

Data centre revival?

As for the company’s data centre segment, Rasgon said that Nvidia’s discussion of the outlook suggests “a sharp deceleration and a blow to the growth story that has been the primary reason to own the stock”. The analyst had lowered his price target to $165 from $175 following the report and downgraded the stock to ‘market perform’ from outperform earlier in the week.

Wells Fargo analyst Aaron Rakers said: “While we think it’s too early to believe that Nvidia’s forward commentary will instill confidence in Nvidia’s return to an upside momentum story… we’re maintaining our outperform rating as we do believe 1Q19 can represent a fundamental bottom with flushed out gaming channel inventory and an eventual (2H2019) recovery in data centre.”

Nvidia stock vitals, Yahoo finance, as at 26 February 2019

A PEG ratio of just 3.55 could suggest that Nvidia’s shares are undervalued given the company’s earnings performance. However, it depends partially on what the future holds. 2020 could see total revenue of less than $10bn, according to Forbes, who argue that the GPU business will make less than that and their Tegra processor revenue could slump to $1.45bn, all due largely to the economic slowdown in China. 

The loss of momentum in crypto could carry on unabated too, again hitting Nvidia’s earnings further. Then again new graphic cards such as the GTX1660Ti, which is out later this month, and the GeForce GTX 1660 Ti – both better than already existing market analogues – will bring an uptick in sales. Tegra is expected to have a poor year however. 

Indeed, if data centre products do grow to the extent Nvidia expects them to, it represents a massive opportunity for extended growth.