Is Nvidia's Gaming Forecast the "Cut" That Wall Street Has Been Looking for?

• After a 50% stock selloff, Nvidia investors have been waiting for a classic signal to start buying again, and analysts are debating if earnings report is that sign

Nvidia Corp. investors may have received the all-clear signal they have been waiting for to start buying the stock again, but some on Wall Street were wondering if the signal was a clear one Thursday.

Nvidia $(NVDA)$ shares have been ripped in half from their all-time high of $333.76 in roughly the past six months, as Nvidia investors waited for "the cut," or for when a chip maker starts scaling back expectations. As Jefferies analyst Mark Lipacis put it: "20 years of semiconductor stock performance tells us that semis typically selloff for 6 months before cuts start, and then start moving higher once the cuts actually do start."

Late Wednesday, Nvidia offered up a "cut," as the chip maker said its revenue for the second quarter would come in $500 million lower than expected. While this can be considered a "cut" in the literal sense, some analysts debated whether it was a cut in name only seeing the reduction was due to COVID lockdowns in China and the war in Ukraine, which had also hit Cisco Systems Inc.'s$(CSCO)$ outlook, rather than one that served as a true gauge of demand.

On Thursday, Nvidia shares closed up 5.2% at $178.51-- following an after-hours drop of the same magnitude late Wednesday following the report -- against a 3.9% advance in the PHLX Semiconductor Index , a 2.7% rise in the tech-heavy Nasdaq Composite Index , and a 2% gain in the S&P 500 index .

UBS analyst Timothy Arcuri, who has a buy rating and a $280 price target, said the "key debate into this print was the gaming outlook -- specifically whether the guidance or commentary would drive enough of a reset to 'clear the decks.'"

"Instead, there are still enough mixed signals to fan the flames of concern around potential downside in the gaming segment especially as Nvidia is now significantly slowing its pace of adding new head count," Arcuri said.

Nvidia did say that gaming revenue would be down sequentially in the second quarter in the "teens" percent, but, then again, $400 million of the China-Russia outlook shortfall was on the gaming side of the business, insinuating the "cut" was a one-time hit, rather than a true indication of gaming demand.

Cowen analyst Matthew Ramsay, who has an outperform rating and a $265 price target, called the earnings report a "very mixed bag indeed," in a note titled, "We Wonder If Investors Will Be Relieved, But Only Partially Satisfied With Gaming Cut?"

Susquehanna Financial analyst Christopher Rolland, who has a positive rating and a $260 price target, wondered if Nvidia "also did not include some reduced sales into the channel in July (and perhaps some in October) to make way for the 4000 series" of new gaming chips code-named 'Lovelace' after British mathematician Ada Lovelace expected in the fall.

Or, as Bernstein analyst Stacy Rasgon, who has an outperform rating and a $225 price target, put it, "We'll take it; a cut is a cut."

"We believe many investors have been wanting to own the Nvidia datacenter story especially after recent stock declines, but have been hesitant to step in front of potentially negative gaming dynamics," Rasgon said. "Viewed in that light those investors got at least some of what they wanted with a decently-sized gaming cut embedded in guidance combined with a continued strong datacenter narrative, though if one wanted to push back one could observe that most of the gaming cut was COVID/Russia vs taking a more measured view of the structural demand environment."

"For bulls hoping for a sentiment-clearing call, we did get sizable datacenter upside with strong forward visibility and a big step toward de-risking the gaming runrate," Ramsay said. "But we didn't quite clear the decks, as the entirety of gaming demand/ASP sustainability fears weren't yet addressed and a slowdown in hiring is being read by some bears as a signal."

Evercore ISI analyst C.J. Muse, who has an outperform rating and a $300 price target, said that while the "cut may fall short of the desired full reset," product releases in the second half of the year were "too interesting to ignore."

"The outlook for gaming remains a bit uncertain, where the market was hoping for a reset to offer investors the all-clear signal," Muse said. "This clearly did not happen, though management is upbeat on the 2HCY22 outlook supported likely in part by a likely end to Chinese lockdowns, an installed base that is still only one-third Ampere, and the next generation GPU architecture Ada Lovelace expected to launch in mid- to late-2022 (market expectations now July-September time frame)."

"So our takeaway? July Q revenues should mark a bottom with a clear path to sequential growth into both the October and January quarters," Muse said. "We think this is enough to suggest the bottoming process for Nvidia shares is coming to an end (now down -54% from 52wk high vs SOX -29%)."

Of the 45 analysts who cover Nvidia, 38 have buy-grade ratings, six have hold ratings, and one has a sell rating. Of those, 24 lowered their price targets, resulting in an average price target of $263.78, down from previous $306.68.