In 2022, the semiconductor industry was one of the industries hardest hit by supply chain disruptions and inflation. As if dealing with these economic headwinds wasn’t difficult enough, the federal government recently imposed restrictions on the sale of chips developed by market leaders NVIDIA (NVDA 0.07%) and AMD to China and Russia citing threats to national security. The news came a week after Nvidia’s lackluster results for the second quarter of fiscal 2023.
The company’s earnings flop and new selling restrictions prompted some investors to dump Nvidia stock. As a result, Nvidia crashed to a fresh 52-week low. While the company appears to be climbing a mountain, there are several reasons investors should take a second look at Nvidia. One of the most interesting aspects of semiconductors in general is how central the products are to energy industries like cryptocurrency, big data, and gaming. Despite underperforming in recent earnings, Nvidia has several tailwinds that could propel the company forward over the long term.
Peel back the onion
Nvidia reports its revenue in two main segments: Graphics and Computers and Networking. For the second quarter (ended July 31), Nvidia reported graphics revenue of $2.8 billion, down 28% year over year (YOY). In comparison, the company’s compute and networking segment generated quarterly revenue of $3.9 billion, up 50% year over year. Given the disconnect between these two main segments, prudent investors should delve deeper into Nvidia’s five market platforms, which together make up the two main segments.
The table below illustrates Nvidia’s five market platforms and the relative growth profile of each:
|market platform||Q2 FY23 Revenue||YOY Change|
|OEM and others||$0.1||(66%)|
Investors can see that Nvidia’s gaming and data center businesses together make up the bulk of the company’s revenue. The data center business grew a whopping 61% and reached $3.8 billion in revenue. According to management, the increase in data center revenue was due to the doubling of the company’s hyperscale business. Hyperscale data centers are much larger than traditional data centers and typically outperform them due to the volume of data they can handle and the superior storage services they can provide. With companies of all sizes increasingly relying on data to make decisions, it’s not surprising that Nvidia is benefiting from this tailwind.
It’s important to note that Nvidia’s management told investors that the company’s business in China has slowed significantly due to the ongoing economic challenges posed by the pandemic, while hyperscale customers in North America have increased.
While Nvidia is far from the only tech company to have faced revenue problems in certain geographic regions, the company — along with other tech companies — could be returning to robustness before a lengthy period given the federal government’s recent mandate to ban the sale of chips Data processing products are growing after China and Russia. While this might easily spook some investors, we have to keep in mind that Nvidia is a global company with several different business segments. Although its hyperscale data center business may face near-term headwinds, the company has several other end markets that it can benefit from.
Is gaming just a fad?
Nvidia’s gaming segment generated $2.0 billion in quarterly revenue, down 33% year over year. The gaming segment is interesting because it serves as the nucleus for so many other industries such as personal computing, graphics cards, and cryptocurrency. In fact, during a recent interview with CNBC, one of Wall Street’s most respected technology analysts, Gene Munster, said that the term “games” for Nvidia’s business is code for “crypto.”
Year-to-date leading crypto tokens Bitcoin (BTC 0.34%) and ether (ETH 1.71%) are down 60% and 64%, respectively. Given the volatility of the stock market and the broader economic outlook, many investors have reduced their positions in equities and alternative assets such as cryptocurrencies in favor of cash as a safe haven.
Although the waning enthusiasm for crypto has hampered sales of high-end computer hardware, it’s important to understand that the economic challenges facing businesses and investors alike will eventually ease. In other words, investors should use a long-term time horizon when analyzing an investment. While the company’s gaming segment has slowed significantly, it is highly unlikely that the crypto market or demand for graphics processing units (GPUs) has been permanently destroyed.
Keep an eye on the rating
The whole of 2022 has been rough for Nvidia. Earlier this year, the company scrapped its plans for a planned mega-merger with competitor Arm Semiconductor. Additionally, economic conditions in China due to the pandemic have impacted the company’s data center business. In addition, the federal government has banned Nvidia from selling certain products to China and Russia, citing national security concerns. Finally, the crater crypto market has significantly impacted demand in Nvidia’s gaming division. All of these issues have contributed to a massive sell-off, with the stock hitting a 52-week low last week.
But despite all this, some on Wall Street remain optimistic. Mizuho analyst Vijay Rakesh recently reiterated his buy rating for the stock, citing strong demand in the hyperscale business. Additionally, several investors claimed on a recent CNBC panel that the stock is unlikely to rise anytime soon given management’s weak guidance for the next quarter. For that reason, Nvidia could soon be a compelling buy.
The most prudent course of action for investors is to assess the company’s results for the next quarter and closely monitor management’s guidance as we look ahead to the year ahead. Should Nvidia stock continue to slide over the next few months, investors with a long time horizon may have a lucrative opportunity to lower their cost base before the stock starts to rally again.