Arya lowered his price target for Nvidia from $600 to $575, which still implies a 26% upside from the current level. He said that Nvidia’s stock price already reflects its strong growth prospects in gaming, data center, and artificial intelligence (AI) markets, and that the company faces some near-term risks such as supply constraints, regulatory hurdles for its Arm acquisition, and rising competition from rivals 1.
He also noted that Intel and AMD are ramping up their efforts to challenge Nvidia’s dominance in the GPU market, especially in the data center segment. Intel recently launched its first discrete GPU for servers, called Ponte Vecchio, which is based on its Xe architecture. AMD, on the other hand, has been gaining market share in the gaming GPU market with its Radeon RX 6000 series, which are powered by its RDNA 2 architecture 1.
Nvidia remains confident in its long-term growth drivers
Despite the downgrade, Nvidia’s management remains confident in its long-term growth drivers, which include gaming, data center, AI, and automotive. In its latest quarterly report, Nvidia posted a 68% year-over-year increase in revenue to $6.51 billion, beating analysts’ estimates by $310 million. Its earnings per share also rose by 89% to $1.04, surpassing expectations by $0.09 2.
Nvidia’s gaming segment, which accounted for 49% of its total revenue, grew by 85% year-over-year to $3.06 billion, driven by strong demand for its GeForce RTX 30 series GPUs. The company also launched new products such as the GeForce RTX 3080 Ti and the GeForce RTX 3070 Ti graphics cards, which offer high performance and ray tracing capabilities for gamers 2.
Nvidia’s data center segment, which represented 32% of its total revenue, increased by 35% year-over-year to $2.05 billion, fueled by the adoption of its Ampere-based GPUs for cloud computing and AI applications. The company also announced new partnerships with Google Cloud (NASDAQ: GOOG) (NASDAQ: GOOGL), Microsoft Azure (NASDAQ: MSFT), and Oracle Cloud (NYSE: ORCL) to offer its AI and data analytics platforms to enterprise customers 2.
Nvidia’s AI segment, which is part of its professional visualization and OEM & other segments, also saw robust growth as more customers used its platforms for natural language processing, computer vision, recommender systems, and conversational AI. The company introduced new products such as the NVIDIA Jarvis framework for building conversational AI applications, the NVIDIA Morpheus application framework for cybersecurity, and the NVIDIA Omniverse platform for creating and simulating virtual worlds 2.
Nvidia’s automotive segment, which accounted for 3% of its total revenue, grew by 6% year-over-year to $152 million, as more automakers adopted its DRIVE platform for autonomous driving and intelligent cockpit systems. The company also announced new collaborations with Volvo Cars, Zoox (a subsidiary of Amazon (NASDAQ: AMZN)), SAIC Motor, NIO (NYSE: NIO), and XPeng (NYSE: XPEV) to power their next-generation vehicles with Nvidia’s technology 2.
Nvidia’s outlook remains positive despite some challenges
Nvidia expects its revenue for the third quarter of fiscal 2024 to be $6.8 billion, plus or minus 2%, which would represent a 55% year-over-year growth. It also expects its gross margin to be 64.6%, plus or minus 50 basis points 2.
However, the company also faces some challenges that could affect its performance in the near future. One of them is the ongoing global chip shortage, which has limited its ability to meet the surging demand for its products. The company said that it expects the supply constraints to persist throughout the rest of the year 2.
Another challenge is the regulatory approval process for its proposed $40 billion acquisition of Arm Holdings, the British chip designer that powers most of the world’s smartphones and tablets. The deal has faced opposition from some of Arm’s customers and regulators in various countries over antitrust and national security concerns. Nvidia said that it is working with regulators to address their issues and that it expects to close the deal by early 2023 2.
A third challenge is the increasing competition from Intel and AMD, which are both investing heavily in their GPU businesses to capture more market share from Nvidia. Intel’s Ponte Vecchio GPU, which is expected to launch in 2023, could pose a threat to Nvidia’s leadership in the data center GPU market, especially as Intel has a strong relationship with many cloud service providers and enterprise customers. AMD’s Radeon RX 6000 series GPUs, which offer comparable performance and features to Nvidia’s GeForce RTX 30 series GPUs, could also erode Nvidia’s gaming GPU market share, especially as AMD has a pricing advantage and a bundling strategy with its Ryzen CPUs 1.
Conclusion
Nvidia’s stock price lost its streak after a rare downgrade from Bank of America, which cited valuation concerns and potential competition from Intel and AMD. However, Nvidia’s fundamentals remain strong, as the company continues to grow its revenue and earnings across its core segments of gaming, data center, AI, and automotive. The company also has a positive outlook for the third quarter of fiscal 2024, despite some challenges such as the chip shortage, the Arm acquisition, and the rising competition. Nvidia’s stock price may have some volatility in the short term, but its long-term growth prospects remain intact.
