Semiconductor giant Nvidia (NVDA -3.17%) may be having a tough time on the stock market this year, but that hasn't deterred Wall Street analysts from being upbeat about the chipmaker's prospects.
This was evident from Mizuho analyst Vijay Rakesh's latest action on Nvidia stock. Although Rakesh lowered his price target to $205 from the earlier level of $225, he maintained his buy rating on Nvidia. The analyst's latest price target implies an upside of 55% within the next 12 months from the stock's closing price on Tuesday.
What's more, among the 39 analysts who cover Nvidia, the most bullish has set a price target of $325, which implies a healthy 12-month upside of 146%. But with Nvidia facing challenges in the form of a weak gaming market and restrictions on sales of data center chips to China, will the graphics card specialist be able to live up to analysts' expectations?
Nvidia's data center business could avoid a big slowdown
Rakesh points out that the demand from hyperscale data center customers in the U.S. continues to remain strong. The analyst's supply chain checks also indicate that hyperscale customers in the U.S. aren't canceling chip orders, though they may be pushing back orders in a bid to navigate the soft market environment.
Data center and cloud solution provider datacenterHawk estimates that data center demand in North America in 2022 is likely to be the highest ever. And according to an estimate from the market research firm Graphical Research, the North American hyperscale data center market could grow at a compound annual rate of 14% through 2027. Similarly, Europe is witnessing robust data center demand this year, but its growth is hampered by limited supply, according to datacenterHawk.
Hyperscale data center demand in Europe is also expected to expand at a nice pace, clocking a compound annual growth rate of 17% through 2027 (again, per Graphical Research).
All this suggests that Nvidia should be able to navigate the negative impact of the restrictions on sales to China. Of course, those limitations on sales will hamper Nvidia's near-term prospects: The company estimates they will result in a $400 million hit to the top line in the current quarter.
The U.S. government's curbs could also impact potential revenue from sales of products Nvidia develops in the future to Chinese customers. Nvidia's estimated $400 million impact means that its revenue is not expected to be 6.8% lower in its fiscal third quarter than the $5.9 billion it originally forecast. However, high demand from the North American and European markets could help the company's data center business avoid a major slowdown.
Nvidia could now shift some of its data center chip supply to other areas where there are shortages. Additionally, Nvidia's impending entrance into the server processor market is likely to give the company another nice shot in the arm in 2023 and beyond.
The chipmaker generated $3.8 billion in revenue from sales of data center chips in its fiscal 2023 second quarter, up 61% year over year. This business seems built for long-term growth, so Nvidia should be able to overcome the near-term weakness and regain its data center mojo in the long run.
Addressing the elephant in the room
The video gaming business is Nvidia's second-largest source of revenue. It produced $2 billion in revenue last quarter and accounted for 30% of the top line. The 33% year-over-year decline in revenue from this business has dealt a big blow to the company's momentum. Its top and bottom lines are expected to shrink significantly in the next couple of quarters, and if Nvidia stock is going to hit analysts' ambitious price targets, a turnaround in the gaming segment will be key.
That looks unlikely in the near term as the combination of weak demand for graphics cards coupled with an excessive supply of them has forced Nvidia to cut GPU (graphics processing unit) prices. Declining PC (personal computer) demand means that Nvidia's video gaming business could continue to struggle in the short run. IDC forecasts that global PC sales could fall by 12.8% in 2022, followed by a 2.6% drop in the combined sales of PCs and tablets in 2023. The market is expected to return to growth in 2024.
So, the systemic end-market weakness poses a big challenge for Nvidia's video gaming business. The company is currently focused on clearing inventories with the help of discounts before it launches its next-generation RTX 40 series cards, but it remains to be seen how its new GPUs will be received by customers.
Is Nvidia stock a buy?
Wall Street may have painted ambitious price targets for Nvidia stock, but a turnaround in its fortunes may take some time to materialize. First, the oversupply in the GPU market will need to end, and demand from data center markets outside of China will need to be solid enough to help Nvidia offset the sales it will lose due to the U.S. government's restrictions.
That's why the massive gains that Wall Street anticipates for Nvidia are likely to take more time to materialize. Additionally, it is worth noting that even though the stock has plunged by 55% this year, it isn't cheap. Nvidia trades at 43 times earnings -- that's a significant premium relative to the Nasdaq-100's earnings multiple of 25x.
Of course, Nvidia stock could regain its mojo in the long run -- its earnings are expected to grow at a compound annual rate of 23% for the next five years, and its revenue and earnings are forecast to start increasing again in its fiscal 2024. But investors could get a better entry point into this semiconductor stock if it heads lower because of the problems it could face in the near term. As such, it would be a prudent idea to wait for Nvidia's turnaround to begin and then buy its shares to benefit from the impressive upside that the company is expected to deliver in the future.