Nvidia's (NVDA 0.86%) stock closed at its all-time high of $333.49 nearly a year ago. However, the chipmaker's share prices were subsequently cut in half as investors fretted over its slowing growth, shrinking margins, and daunting regulatory headwinds. Nvidia remains a polarizing investment, but could this former high-growth darling finally bounce back in 2023?
What happened to Nvidia over the past year?
Nvidia is the world's largest producer of discrete graphics processing units (GPUs) for PC gaming and data centers. Those two markets accounted for 91% of its revenue in its latest quarter. The remaining 9% came from its smaller professional visualization, automotive, and original equipment manufacturer (OEM) chip markets. Nvidia still controlled 80% of the discrete GPU market in the second quarter of 2022, according to JPR. Advanced Micro Devices (AMD 1.08%) held the remaining 20%.
Image source: Nvidia.
Nvidia and AMD both generated robust sales of GPUs during the pandemic as stay-at-home measures prompted consumers to upgrade their gaming PCs or buy new PCs for remote work and online classes. The skyrocketing usage of cloud-based services also boosted Nvidia's shipments of higher-end GPUs for data centers. Rising prices of cryptocurrencies, many of which can still be mined with Nvidia and AMD's higher-end GPUs, amplified that growth.
But over the past year, most of those tailwinds dissipated. PC sales slowed down in a post-pandemic market, while macro headwinds caused many enterprise customers to postpone their cloud deals. The cryptocurrency market also crashed, driving GPU prices off a cliff as disillusioned miners flooded the secondhand market with used cards.
To make matters worse, the Biden administration recently banned all exports of advanced semiconductors (which includes Nvidia's top-tier A100 and H-100 data center GPU products) to China. The country had already been a soft spot for the chipmaker amid the ongoing lockdowns stemming from the government's "zero COVID" policies.
How painful was Nvidia's slowdown?
Nvidia's revenue rose 61% to a record $26.91 billion in fiscal 2022, which ended this January, while its adjusted EPS soared 78%. But in the first nine months of fiscal 2023, Nvidia's revenue rose a mere 9% year over year to $20.92 billion as its adjusted EPS declined 21%. The following table highlights the primary causes of that slowdown.
|
Segment |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
|---|---|---|---|---|---|
|
Gaming revenue growth (YOY) |
42% |
37% |
31% |
(33%) |
(51%) |
|
Data center revenue growth (YOY) |
55% |
71% |
83% |
61% |
31% |
|
Total revenue growth (YOY) |
50% |
53% |
46% |
3% |
(17%) |
Data source: Nvidia. YOY = year over year.
Nvidia expects its revenue to decline about 21% year over year in the fourth quarter and remain roughly flat for the full year. Analysts also expect its full-year revenue to stay flat as its adjusted EPS falls 26%.
During its latest conference call, CFO Colette Kress predicted that Nvidia's data center business would still struggle with "softness in China" in the fourth quarter, but that its gaming business would "resume sequential growth" in revenue after suffering a staggering sequential drop of nearly 44% in the third quarter.
Nvidia's revenue is still declining, but its gross margin is gradually stabilizing. Its adjusted gross margin rose sequentially from 45.9% in Q2 to 56.1% in the third quarter, and it expects that figure to expand to 66% in Q4, which would also represent a 60-basis-point improvement from the fourth quarter of fiscal 2022. That year-over-year stabilization suggests that Nvidia can maintain its long-term pricing power in the GPU market.
What will happen next year?
Nvidia didn't provide any guidance for fiscal 2024. However, it believes the stabilization of the gaming, data center, and automotive markets will enable its revenue to grow sequentially over the next few quarters.
Kress expects Nvidia's gaming business to improve as it works through the "channel inventory corrections" caused by the post-pandemic slowdown in video games and exacerbated by the decline of the crypto market. A relaxation of the zero-COVID restrictions in China could also stabilize its sales of lower-end gaming GPUs in the country -- even though that market remains hobbled by government-mandated playtime restrictions for minors.
Unfortunately, the broader PC market will still probably shrink next year. IDC expects global shipments of personal computing devices (PCs and tablets) to decline by 10.8% in 2022 and drop another 2.3% in 2023.
As for the data center business, Nvidia projects new hyperscale cloud deployments in the U.S. will offset its weaker growth in China. It also plans to keep selling its lower-end A800 data center GPU products, which aren't subject to the Biden administration's export bans, to Chinese customers.
Based on these expectations, analysts forecast Nvidia's revenue and adjusted EPS to rise 10% and 31%, respectively, in fiscal 2024. Those growth estimates seem realistic given the company faces an easy year-over-year comparison to its slowdown in fiscal 2023, but they arguably aren't impressive enough for a stock that trades at 35 times forward earnings.
Simply put, I don't think Nvidia's stock will rally meaningfully over the next 12 months. It's still a good long-term investment if the projected growth in the gaming and data center markets materializes, but it clearly faces too many near-term headwinds.
