Nvidia should dodge massive coronavirus effects thanks to data centers and videogames

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Business in the Age of COVID-19: Data-center sales expected to top $1 billion for first time, gaming chips expected to grow 25%

 

This article is part of a series tracking the effects of the COVID-19 pandemic on major businesses, and will be updated. It was originally published on May 20.

 

Nvidia Corp. could escape severe effects from COVID-19 because of strong demand for artificial-intelligence capabilities in cloud data centers and a whole bunch of people playing videogames.

Nvidia NVDA, -0.41% is expected to top $1 billion in quarterly data-center sales for the first time when it reports first-quarter earnings after the close of trading on Thursday, even as it launches new products in that area. Sales of gaming chips are expected to grow roughly 25% from last year as Americans sheltering in place turn to virtual worlds for entertainment.

 

Expectations for Nvidia have slipped only barely since the coronavirus began to sweep across the globe, as analysts see continuing demand for its products and continuing strong results from other large chip makers. Intel Corp. INTC, -0.78% and Advanced Micro Devices Inc. AMD, -2.25% have shown the chip sector is benefiting from increased demand from PC and gaming console makers as a result of shelter-in-place mandates from COVID-19, while the infrastructure that supports digital work/play-from-home lifestyles — namely, data centers — is also receiving a boost.

Confidence in the positioning of Nvidia and semiconductors in general has led investors to push the company’s stock to record highs, picking back up from when the company reported fourth-quarter earnings on Feb. 14, about a month before the COVID-19 pandemic was declared.

Shares pulled back Thursday, and were last down 1.1% at $354.86, following a four-session run of record closing highs. Nvidia’s stock is up more than 50% for the year, and has gained 21% in May alone.

What the numbers are saying

Revenue: Analysts surveyed by FactSet expect Nvidia, on average, to report revenue of $2.97 billion, up from $2.22 billion in the year-ago period. Nvidia had forecast revenue of $2.94 billion to $3.06 billion for the quarter in February. Analysts have barely budged from an average forecast of $3 billion at the end of February despite the spread of COVID-19.

Analysts expect a 24% rise in gaming sales to $1.3 billion from a year ago, and a 66% surge in data-center sales to $1.05 billion, which would be Nvidia’s first quarter where data-center sales top the billion-dollar mark. In the fourth quarter, data-center sales came in at a record $968 million.

Earnings: Analysts expect adjusted earnings of $1.65 a share, up from 88 cents a share in the year-ago period, when many analysts were predicting weak data-center demand. As of the end of February, analysts were expecting $1.70 a share in adjusted earnings, according to FactSet.

Stock movement: In the first quarter, Nvidia shares rose 12%, compared with an 18% drop in the PHLX Semiconductor Index SOX, -1.60%, a 20% fall in the S&P 500 index SPX, -0.62%, and a 14% drop in the tech-heavy Nasdaq Composite Index COMP, -0.63%.

What the company is saying

May 14: Nvidia launched its newest line of chips dubbed “Ampere” during its online GPU Technology Conference, and pointed out many ways in which the machine-learning technology it enables is being used to combat COVID-19.

May 5: Nvidia said it was acquiring Cumulus Networks to supplement its recently closed acquisition of Mellanox Technologies Ltd.

April 6: Nvidia said it joined the COVID-19 High Performance Computing Consortium aimed at using AI systems to aid in COVID-19 research.

March 24: The company said it was providing 90-day free licenses for its GPU virtualization software to help support work-from-home environments.

March 19: Nvidia said it was providing COVID-19 researchers with a free 90-day license to its Parabricks genome-analysis software

What analysts are saying

• “We expect a reasonably solid April, with perhaps slight upside to the July quarter outlook — but below some of the recent sell-side previews. Both gaming and cloud have been strong year-to-date, but both are slowing down, and there will probably be some conservatism in the company’s tone around the second half of the year, similar to what we have heard from peers.” — Morgan Stanley analyst Joseph Moore, who has an overweight rating and a $282 price target on Nvidia.

• “We expect Nvidia to fare better than most this earnings season. Slower consumer demand from China could weigh, but strong [data-center] results are likely to overcome.” — Susquehanna Financial analyst Christopher Rolland, who has a positive rating on Nvidia and raised his price target to $410 from $355.

• “While there is no one single event we can point to which has led us to change our thinking, the continued execution on the data center side, along with the latest product rollout, has helped. We believe Nvidia is uniquely positioned to continue to benefit from a massive shift in the compute landscape.” — BMO Capital Markets analyst Ambrish Srivastava, on his recent upgrade of Nvidia to outperform from market perform and price target hike to $425 from $285.

• “We expect data center (31% of F4Q20 sales), which is NVDA’s largest growth driver, to continue benefiting from increased demand for both public and private clouds due to the ramp of data consumption in the cloud. Moreover, the migration of data from on-prem to the hybrid and public clouds has continued to accelerate.” — Needham analyst Rajvindra Gill, who has a buy rating and a $360 price target on Nvidia.

Of the 41 analysts who cover Nvidia, 33 have buy or overweight ratings, five have hold ratings, and three have sell ratings, along with an average price target of $327.88, according to FactSet data.

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