- Disappointing preliminary quarterly results pushedNvidia(NVDA) stock lower earlier this month.
- However, shares in the chip maker have since made up their recent losses.
- While facing challenges, as the company's long-term prospects remain solid, the market wasn't wrong in "buying the dip."
So far in August,Nvidia(NASDAQ:NVDA) stock has been making some whipsaw moves. Following its announcement of preliminary results for the preceding quarter, investors bailed out of the chip maker’s shares, sending the stock lower by double-digits over two trading days.
But not too long after that, the stock bounced back to levels seen just before the preliminary earnings news. At first glance, you may think this is an odd move for shares to make. After all, the latest results suggest more challenges lie ahead, particularly for one of its largest operating segments (the sales of graphics processing unit [GPU] chips to the gaming market).
However, taking a closer look at the numbers, it’s clear this sharp slide was an overreaction. Hence, the market’s decision to “buy the dip” was a perfectly rational one. While one area is experiencing weakness now, strength in another segment could outweigh it.
NVDA Stock and Its Preliminary Numbers
On Aug. 8, Nvidia released preliminary results for its second fiscal quarter (ending July 31, 2022). It’s apt to say the figures were disappointing. For the quarter, the company expects to report$6.7 billionin revenue. This figure is well below Nvidia’s prior outlook calling for $8.1 billion in revenue.
Given this revenue miss, it’s easy to see why NVDA stock took such a hit on the heels of this release. The main driver behind this expected miss is a big drop in its gaming-related revenue. This segment’s top line is set to drop 33% from the prior year’s quarter and 44% on a sequential (quarter-over-quarter) basis.
The pandemic tailwinds for gaming have long since passed. Even worse, it’s possible that gaming demand was simply pulled forward during 2020 and 2021. This may mean more challenges before results begin to improve. A drop in demand for its GPU chips from crypto miners could also hurt its operating performance in the months ahead.
Nevertheless, there is a key bright spot: its data center segment. Looking more closely at recent data center results, it’s too soon to say the company’s overall prospects have taken a turn for the worse.
Nvidia’s Data Center Silver Lining
The preliminary earnings for NVDA stock helped to briefly give credence to the bearish view that, as economic growth slows down compared to the boom times of 2021, the company’s own growth will take a big hit.
However, as I argued at the start of August, its strength in some areas (like cloud computing),could outweigh weakness in other areas(like gaming). The latest numbers from Nvidia could help to back this view. How so? Gaming results for Q2 may be disappointing, but it could be a different story with its data center results.
Revenue for the segment is expected to jump 61% year-over-year. Demand from enterprise end-users continues to be robust. Furthermore, although results were up just 1% sequentially, don’t blame it on weak demand. At least, that’s the view of Raymond James’ Melissa Fairbanks. In her last research note, released after the preliminary earnings numbers, Fairbanks reiterated her “buy” rating, although she did trim her price target.
More importantly, the analyst noted that the weak sequential growth with the data center unit was due to supply chain issues, not demand issues. This could mean a re-acceleration of growth as supply bottlenecks clear up.
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