Nvidia’s move to save data center sales in China, questioned playing card market is heading for gains

How Nvidia Corp.’s move to save $ 400 million in risky data center sales in China will turn out and when playing card sales normalize as the industry faces a crowded holiday lineup appear to be the big two questions investors want answers this week.

Nvidia NVDA,
-0.20%
should report third quarter earnings after market close on Wednesday.

Recently, Nvidia said that to avoid an estimated $ 400 million loss in sales, it will start selling a limited version of its A100 data center chip called the A800, which inhibits the use of AI and supercomputer and thus satisfies US restrictions on sales to China.

While Susquehanna financial analyst Christopher Rolland said he believes Nvidia’s third quarter “has been largely reduced to risk” and that fourth quarter forecasts “should have some mitigating positives,” he noted that sales in China are still under discussion, even with the Mod A800.

Rolland, who has a positive valuation on the stock and a target price of $ 180, said that while he has a good read on the company’s gaming business, the data center business is harder to predict because it’s unclear how many A800s would compensate. the estimated $ 400 million in lost sales of the A100.

Analysts surveyed by FactSet predict Nvidia will see $ 3.73 billion in data center sales, or a 27% increase from a year ago.

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Furthermore, it is not clear when the current decline in demand for playing cards will touch its minimum. Analysts are divided on whether it has already done so or whether demand will hit low next year as the market is flooded with new gaming cards not only from Nvidia but also from Advanced Micro Devices Inc. AMD,
+ 1.60%
and Intel Corp. INTC,
-0.26%.

Earlier this month, AMD rolled out its next-generation game cards and assured Wall Street that data center and embedded chip sales would continue to grow, after seeing a 45% increase in data center sales. to 1.6 billion dollars against Intel’s 27% drop to 4.2 billion dollars. This comes as PC and consumer demand plummeted after two years of pandemic-fueled sales, contributing to a $ 1 billion drop in AMD’s third-quarter sales.

Game cards from AMD join the new cards from Intel and Nvidia that went on sale on October 12th. This puts a lot of inventory into the holiday channel at a time when PC shipments are dropping to the highest recorded rates and a wave of second-hand graphics processing units, or GPUs, are hitting the market as mining operations are hitting the market. unprofitable cryptocurrency fold. Bitcoin BTCUSD,
+ 2.54%
is down 64% and ethereum ETHUSD,
+ 2.99%
is down 66% year to date, putting their performance on par with the worst in the S&P 500 SPX index,
-0.89%
had to offer, including shares in the parent company of Facebook Meta Platforms Inc. META,
+ 1.06%,
which lost two thirds of their value in 2022.

Just a month after its launch, Nvidia’s flagship RTX 4090 card is in stock and on sale, according to more than a few Nvidia-suggested online retailers, for around $ 2,300, compared to the suggested retail price of $ 1,599. The RTX 4080, which starts at $ 1,199, is scheduled for release on Wednesday, the same day the earnings report comes out, while the next-generation low-end RTX 3060 Ti is on sale online for around $ 400. and the RTX 3080 Ti for $ 900.

Meanwhile, the three chip makers continue to stick their fingers in each other’s pies. Recently, AMD launched the fourth generation of its Epyc data center processor in an effort to gain even more space from the likes of Intel in the CPU arena, which Nvidia recently entered with its own Grace CPU.

What to expect

I earn: Of the 37 analysts surveyed by FactSet, Nvidia is expected to average adjusted earnings of 71 cents per share, down from $ 1.17 per share a year ago and down from $ 1.33 per share originally forecast. of the quarter.

Income: Wall Street expects revenue of $ 5.78 billion from Nvidia, according to 34 analysts interviewed by FactSet. This is down from $ 7.1 billion in sales in the quarter a year ago and well below the $ 8.41 billion forecast at the start of the quarter.

Inventory movement: During Nvidia’s third quarter, or late October, shares fell 25.7%, while the PHLX Semiconductor SOX Index,
-0.97%
it fell 19.6% over that period. Meanwhile, the S&P 500 SPX Index,
-0.89%
fell 6.2%, while the Nasdaq Composite Index COMP,
-1.12%
it lost 11.3%.

What the analysts say

In the broader data center market, Susquehanna’s Rolland predicts that AI and investments in the so-called metaverse will hold the market together.

“Additionally, large-scale investment comments suggest continued investments in AI and Meta Platforms Inc. META,
+ 1.06%
issued a guide to higher investments for 2023, “said Rolland.” In short, we believe games may have seen its lowest in Q3, while [data center] they might still be united. “

In support of its latest call regarding gaming cards, Rolland said retail GPU rewards for Nvidia cards, which had been up to 130% in mid-2021, have fluctuated at a 2% discount below. suggested retail in the third quarter, and noted that the company was cleaning up old inventory as it moved towards the 40 Series launch.

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Stifel analyst Ruben Roy, who has a hold rating and a price target of $ 165, is not sure how much of the $ 400 million hole will be filled as “the potential adoption of this workaround is likely to take time. “. In games, Roy believes the underlying process “has begun” and has stated that he does not expect normal running speed in games until late 2023.

Oppenheimer analyst Rick Schafer, who has a buy valuation and target price of $ 225, also said the A800 “needs time to prove it” and believes the game will correct itself in the first half of 2023. .

Focusing more on the broader cloud market, Jefferies analyst Mark Lipacis, who has a purchase valuation and target price of $ 225, said Nvidia has accounted for nearly 100% of new accelerator deployments since February, to except for June, when it was 98% – according to data from six cloud service providers and that its overall share in the accelerator market is 88%.

“In 2016, Nvidia’s GPUs began acquiring shares of data center processing cycles,” said Lipacis. “In total, we estimate that data center processor revenue grew 14% [compound annual growth rate] over the past 15 years and we expect the growth rate to continue for the next 5-10 years ”.

BofA Securities analyst Vivek Arya, who has a buy rating and target price of $ 205, said that while he expects cloud capital spending to remain “under short-term pressure,” chip stocks “They remain in an ideal position to benefit from the exponential growth in computing complexity required for artificial intelligence and high-speed networking.”

Arya expects demand for public cloud services to nearly triple by 2026 to $ 300 billion, a structural positive for its top pick Nvidia.

Of the 42 analysts covering Nvidia, 30 have buy ratings, 11 have maintenance ratings, and one has a sell rating, with an average price target of $ 188.10, a premium of 15% over the current price, according to FactSet data.

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