Chipmaker NVIDIA (NVDA 2.62%) has beaten the coronavirus-induced stock market sell-off so far, thanks to a solid set of results and outstanding guidance issued a couple of months ago.
NVIDIA appears well-positioned to weather the COVID-19-led downturn, thanks to an increase in video-gaming activity on account of people staying indoors. Reports from different locations across the globe suggest that there has been a substantial surge in internet usage as more people take to gaming to beat boredom.
In the U.S., for instance, Verizon reports that there has been a 75% increase in gaming activity on account of the COVID-19 pandemic. This creates an ideal situation for NVIDIA to sell more graphics cards, as PCs account for nearly a fourth of gaming devices. Not surprisingly, NVIDIA stock has stood out while the broader chip market has undergone a big correction.
However, doubts have emerged as to whether the uptick in gaming activity will lead to an actual increase in graphics card sales.
Is NVIDIA's gaming business about to hit a speed bump?
When NVIDIA released its fiscal fourth-quarter results in early February, the company issued robust guidance even after accounting for the effect of the novel coronavirus pandemic on its business. The graphics specialist aims to deliver 35% annual revenue growth in the first quarter of fiscal 2021, even though it had to reduce its top-line guidance by $100 million due to COVID-19.
Image source: Getty Images.
NVIDIA is expecting $3 billion in revenue at the mid-point of its guidance range in the ongoing quarter, while Wall Street was originally looking for $2.85 billion.
NVIDIA's gaming business was the driving force behind its impressive performance last quarter. Gaming supplies nearly half of NVIDIA's top line, and it enjoyed a 56% bump in revenue last quarter. That's not surprising, as the chipmaker dominates the gaming GPU (graphics processing unit) space with a market share of nearly 70%.
Ideally, NVIDIA's momentum in this business should continue. Graphics cards make gaming more engaging and immersive, as they allow people to play higher spec games. But the situation on the ground appears to be different. Citing sources at anonymous motherboard manufacturers, DigiTimes (requires subscription) reported last month that graphics card sales could hit record lows in the first half of 2020. The publication added that supply disruptions related to factory shutdowns in China and weak demand could weigh on GPU sales.
DigiTimes' sources told the publication that sales of motherboards and GPUs in China were down in the range of 30% to 50% year over year in February. A turnaround isn't expected until July. That's said to be the reason why NVIDIA declined to reveal new products at its GPU Technology Conference last month, as the chipmaker is reportedly waiting for an uptick in demand.
The company had clarified in February that gauging the "ultimate effect of the coronavirus is difficult to estimate." So, there's a chance that NVIDIA's graphics card sales may take a hit when it releases its quarterly results next month.
The good part is that another side of NVIDIA's business could come in handy in such a situation and help offset some of the weakness in the gaming business.
Datacenter could be a savior
NVIDIA's data center business supplied 31% of its total revenue last quarter, growing an impressive 42% over the prior-year period. The company credited this terrific growth to an increase in demand for hyperscale data centers that tackle artificial intelligence (AI) workloads.
As it turns out, data center loads have been spiking amid the novel coronavirus pandemic. Some countries have been forced to throttle data speeds so that the internet does not break. In such a scenario, NVIDIA's data center-specific GPUs could help boost capacity and also help researchers fight COVID-19 by accelerating research with the help of AI.
It is difficult to predict how the company's data center sales will shape up during these uncertain times. Any weakness on this front -- along with weakness in gaming -- could send the chipmaker's shares into a downward spiral.
But investors should keep in mind that NVIDIA is a long-term play on tech trends such as AI, autonomous cars, and the cloud. More importantly, its balance sheet seems strong enough to ride out the novel coronavirus pandemic.
The company has a cash pile of $10.9 billion and debt of just $2 billion. NVIDIA's free cash flow has also jumped remarkably over the past year.
NVDA Free Cash Flow data by YCharts
As such, a drop in NVIDIA shares may be treated as a buying opportunity. NVIDIA stock is currently trading at 58 times last year's earnings, which is significantly higher than the five-year average P/E ratio of 39. If NVIDIA falls on account of weakness in the gaming business, it could open up an opportunity for investors to get into this technology stock at a cheaper valuation.
