The viral adoption of ChatGPT has raised expectations for Nvidia's sales growth. That could help drive average selling prices for the data-center segment even if sequential unit growth is below consensus.
Nvidia announced that it will release its fourth-quarter, fiscal 2022 earnings report after the market closes on Wednesday, Feb. 22.
Analysts expect Nvidia to post revenue of $6.02 billion, down 26.9% from the same period of the last year. Adjusted net profit is expected at $2 billion, and adjusted EPS of $0.81 for the quarter, according to Bloomberg consensus.
Prior Period Results and Q4 Outlook
NVIDIA reported revenue for the third quarter ended October 30, 2022, of $5.93 billion, down 17% from Q3, fiscal 2021. Data-center revenue jumped 31%, also beating projections, compared with a 51% drop for the company’s gaming business.
Data centers are a bright spot in a computing industry still mired in a slump. Makers of chips for laptops and desktops suffered a steep decline in orders in the year as recession-wary customers put off big-ticket electronics purchases.
The company expects fourth-quarter revenue to be about $6 billion, plus or minus 2%. That compares with an estimate of $6.02 billion. Third-quarter profit came in at 58 cents a share, excluding some items, short of the 70-cent projection.
What to Watch in Q4, Fiscal 2022 Results
Nvidia's ChatGPT Tailwind
AMD’s results suggest that data-center capital spending from hyperscale cloud vendors for accelerators and graphics processing units has been resilient, while the viral adoption of ChatGPT has raised expectations for Nvidia's sales growth. That could help drive average selling prices for the data-center segment even if sequential unit growth is below consensus.
Nvidia's CEO Jensen Huang has previously voiced bullish sentiment regarding the potential AI tailwind for computing. In that context, he termed ChatGPT as a game-changer and an "iPhone moment" of AI--potentially boosting Nvidia's sales growth.
The reasoning behind the potential sales boost for Nvidia is relatively simple. Nvidia holds a dominant position in the market for chips designed for intensive computing required for AI applications. As more people utilize ChatGPT, the program OpenAI will require more computing power to generate responses to the numerous queries received.
According to an estimate from Citigroup, the growth of ChatGPT usage could bring in sales of between $3 billion and $11 billion for Nvidia over the course of a year. Although it is challenging to predict growth for a new service like ChatGPT, analyst Atif Malik arrived at these figures by considering projections for the number of words generated by ChatGPT and the revenue per word for Nvidia. Similar commentary was voiced by analysts at Bank of America and Wells Fargo.
Game Faces Sales Headwinds
The gaming segment may remain pressured as the inventory correction in consumer PCs limits demand for Nvidia's graphics chips. A top-line recovery in gaming is unlikely through 1H and possibly 2H amid the chance of a broader economic slowdown.
Gaming was once Nvidia’s main breadwinner but on the back of lowered demand, it lost its leading spot to Data Center. Nevertheless, Rakesh notes the company’s leadership position in the segment, estimating Nvidia still claims more than a 70% PC share. And after the severe pullback, checking in with the supply chain, there are indications inventory digestion is “potentially normalizing” with the bottom of the cycle now most likely in the rear-view mirror.
Additionally, new releases of the RTX 40-series GPUs should “provide tailwinds” in the first half of the year. Analyst Rakesh reckons that at present, around 50% of the PC market uses NVDA GPUs that are two or more generations behind, suggesting there is still a “good upgrade opportunity” in Gaming.
Analysts Opinions
Bank of America is excited about Nvidia’s long-term potential within artificial intelligence.
Analyst Vivek Arya reiterated his buy rating in Nvidia and upped his price target by $40 to $255. That new target implies the graphic cards maker’s stock could rally 17% from where it closed Monday.
He said the company could specifically stand to benefit from generative AI, which is focused on creating new outputs based on data already understood by the system. ChatGPT is one of the best-known examples of generative AI.
“NVDA’s full-stack of accelerated silicon/systems/software/developers positions it uniquely to lead the nascent generative AI arms-race among global cloud and enterprise customers,” he said in a note to clients Tuesday.
Mizuho analyst Vijay Rakesh thinks the semiconductor giant is set up well to withstand any further bearish developments in 2023.
“Despite near-term inventory and macro concerns,” said the 5-star analyst, “we believe NVDA remains dominant in Data Center AI, establishing a wide competitive moat in terms of performance and roadmap execution. In Gaming, we see NVDA remaining the performance and market share leader, with demand remaining relatively stable.”
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