Earnings Outlook: The bar for Nvidia’s data-center sales may not be low enough

Nvidia Corp. may face problems overcoming high expectations in its data-center business amid the release of new gaming cards, and that could hurt the stock as investors focus on the chip maker’s second-largest business rather than its core business.

Nvidia NVDA, +2.84%  is scheduled to report second-quarter results on Thursday.

Even as Nvidia releases new gaming chips to compete with upstart Advanced Micro Devices Inc. AMD, +16.20% , the company is going to have to contend with weak data-center sales that it forecast during its last earnings report.

But some analysts think expectations are too high. The Wall Street consensus forecast for data-center revenue has declined to $673.7 million, or 11% off sales from a year ago, compared with the $725.6 million forecast before the weak outlook.

Bernstein analyst Stacy Rasgon, who has a market-perform rating and a $150 price target, said the Street seems to be expecting too much out of data-center sales.

Rasgon said “we believe Street estimates for data-center appear very aggressive with strong sequential growth beginning in FQ3 (up by >$120M QoQ and above prior peak levels, which itself was inflated), potentially challenging in the current environment which may not prove to be hugely supportive.”

“Additionally, we are surprised that consensus estimates into next year barely came down following the removal of full-year guidance last quarter,” Rasgon said.

Earnings: Of the 26 analysts surveyed by FactSet, Nvidia on average is expected to post adjusted earnings of $1.14 a share, up from the 92 cents a share expected at the beginning of the quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $1.15 a share.

Revenue: Wall Street expects Nvidia revenue to decline 18% to $2.55 billion from a year ago, according to 28 analysts polled by FactSet. That’s down from the $2.56 billion forecast at the beginning of the quarter. Nvidia predicted revenue of $2.5 billion to $2.6 billion. Estimize expects revenue of $2.55 billion.

Revenue from gaming, Nvidia’s largest business, is expected to decline nearly 29% to $1.29 billion.

Stock movement: Nvidia shares are down 1.2% since the company’s last earnings report. In comparison, the PHLX Semiconductor Index SOX, +2.69% rose 4.3%, the S&P 500 index SPX, +1.88% advanced 2.2%, and the tech-heavy Nasdaq Composite Index COMP, +2.24% increased 1.8%.

What analysts are saying: Of the 36 analysts who cover Nvidia, 25 have buy or overweight ratings, eight have hold ratings and three have sell or underweight ratings, with an average price target of $182.88.

Instinet’s David Wong said Nvidia’s “impressive run” data-center growth appears to have stalled.

“With data-center (GPU) sales growing just 4% QoQ in the October 2018 quarter, then falling 14% sequentially in the January 2019 quarter and a further 7% QoQ in the April 2019 quarter (April 2019 down 10% YoY), we expect another YoY decline in data-center segment revenues in the July 2019 quarter and possibly again in the October 2019 quarter,” Wong said in a note

On the other hand, Mizuho analyst Vijay Rakesh, who has a buy rating and a $192 price target, said while valuations on the stock are steep, “we believe current Street estimates are conservative, so that improving PCs, AI deep learning and inferencing markets, gaming trends, automotive and data-center position for upside to estimates.”

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