Nvidia Stock Surges as Gaming Drives Earnings Beat

Shares of Nvidia (NASDAQ:NVDA) are trading sharply higher on Thursday after the chip company reported better-than-expected results for its fourth quarter.

Nvidia beat on revenue and net income for its fourth quarter, even though both categories declined on an annual basis. Nvidia posted adjusted earnings per share (EPS) of $0.88 in the quarter that ended January 2023, down from $1.32 per share in the year-ago quarter, but topping the consensus estimates of $0.81 per share.

Gaming Fuels Better-Than-Feared Results

Revenue came in at $6.05 billion, above the consensus projection of $6.00 billion. This marks a notable decline of 21% from last year when Nvidia generated $7.64 billion in sales. But despite year-over-year (YoY) declines, investors viewed Nvidia as one of the well-positioned chip stocks to weather the ongoing economic downturn that continues to weigh on PC and chip sales.

As for the full fiscal 2023, Nvidia reported revenue of $26.97 billion, relatively unchanged from a year ago. The company’s GAAP earnings per diluted share stood at $1.74, down 55% YoY. Non-GAAP earnings per diluted share were $3.34, marking a YoY decline of 25%.

The company’s gaming revenue declined in the quarter, which was expected as sales remained significantly elevated in recent years. Nvidia’s sales skyrocketed during the pandemic as gamers invested in new graphics cards, though that growth saw a notable slowdown in the past year.

The tech giant reported gaming revenue of $1.83 billion in Q4, down 46% YoY. The drop came due to slower chip demand from Nvidia’s partners because they have too much stock at the moment, Nvidia said. Additionally, the company also sold fewer chips for gaming consoles during the period, such as the one powering Nintendo’s Switch devices.

On the other hand, Nvidia’s gaming revenue grew 16% on a quarterly basis. Nvidia’s CFO Colette Kress said the YoY drop came due to an inventory correction, noting that its gaming business has now started to recover, especially in China.

“Gaming is recovering from the post-pandemic downturn, with gamers enthusiastically embracing the new Ada architecture GPUs with AI neural rendering,” she said.

Nvidia’s other business segments including professional visualization and car chips, remain significantly smaller than its gaming and data center units. The company’s professional visualization division generated $226 million in revenue, down 65% YoY, while automotive revenue grew 135% from last year to $294 million.

For the current quarter, Nvidia expects $6.5 billion in sales, beating the analyst consensus of $6.33 billion.

Nvidia shares received an additional boost in Thursday’s pre-market trading after Goldman Sachs analysts upgraded to Buy from Neutral.

"We believe the combination of positive estimate revisions and a potential expansion in the stock’s multiple - consistent with historical recovery phases - will drive continued outperformance in the stock," the analysts wrote in an upgrade note.

On February 22nd, 2023, Nvidia recorded a price-to-earnings ratio of 88.31, which has now increased to 99.07 at the time of writing on February 23rd.

Generative AI a ‘Massive’ Opportunity

The tech company’s data center unit, which manufactures chips for artificial intelligence (AI), retained its robust growth rate. Further, the data center business could continue benefiting from emerging AI software, such as OpenAI’s ChatGPT chatbot, supported by Microsoft (NASDAQ:MSFT). Analysts believe that Nvidia’s high-end graphics processors are well-equipped to train and operate machine learning (ML) software.

This growth rate is only expected to increase further, as the global machine learning industry is expected to reach $209.91 billion in 2029, from 2022’s $21.17 billion.

Jensen Huang, Chief Executive Officer of Nvidia, told analysts that AI is currently at an “inflection point,” urging businesses of any size to buy Nvidia chips and facilitate the development of ML software.

“Generative AI’s versatility and capability has triggered a sense of urgency at enterprises around the world to develop and deploy AI strategies,” Huang said.

For Rosenblatt analysts, Nvidia is facing "the biggest technology inflection the world may have ever seen in transformational AI everywhere and in everything."

The company wants to help its customers “take advantage of breakthroughs in generative AI and large language models. Our new AI supercomputer, with H100 and its Transformer Engine and Quantum-2 networking fabric, is in full production,” he added.

The majority of Nvidia’s GPU sales for AI fall under the company’s data center business, which saw its revenue grow 11% YoY to $3.62 billion as the unit saw stronger demand from US cloud service providers, the company said.

Among other partnerships, Nvidia is teaming up with multiple leading cloud service firms to provide AI-as-a-service that would give enterprises access to the companies’ sophisticated AI platform.

In other words, it will allow customers to engage each layer of Nvidia AI including the AI supercomputer, acceleration libraries software, or pre-trained generative AI models - all as a cloud service, said Nvidia.

Customers will be able to tap the Nvidia DGX AI supercomputer using the Nvidia DGX Cloud through a browser. This cloud service is already available on Oracle (NYSE:ORCL) Cloud Infrastructure, and is expected to become available on Microsoft Azure and Google (NASDAQ:GOOGL) Cloud Platform, among others.

The AI platform software layer will let users access the Nvidia AI Enterprise, which allows them to train and deploy big language models or other AI workloads. Huang said the company wants to establish an infrastructure that would place AI in reach of all enterprise customers.

Summary

Nvidia shares soared on Thursday after the chipmaker’s Q4 results and revenue guidance proved to be better-than-feared despite a slowdown in PC demand. Analysts continue to highlight a massive generative AI opportunity, which could drive a meaningful reacceleration in Nvidia’s revenue growth for years to come.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.