Nvidia shares hit by softer earnings guidance

NVIDIA Corp (All Sessions) unveiled record first-quarter sales and record data centre and gaming revenues. Sales for the three months to May 1st at America’s biggest chip maker rose 46% to $8.29 billion – up 8% on the fourth-quarter.

However, net income almost halved (down 46%) to $1.6 billion from $3 billion in the previous quarter ($1.9 billion in the first-quarter 2021) after the graphics card producer took a $1.35 billion hit from the axed Arm acquisition.

The strong sales growth was achieved, “against the backdrop of a challenging macro environment,” Jensen Huang, the company’s founder and CEO, told shareholders.

“The effectiveness of deep learning to automate intelligence is driving companies across industries to adopt Nvidia for AI computing,” he added. “Data center has become our largest platform, even as gaming achieved a record quarter.

Huang says that the company is readying itself for “the largest wave of new products in our history with new GPU, CPU, DPU and robotics processors ramping in the second half.” He believes Nvidia’s new chips and systems will “greatly advance AI, graphics, Omniverse, self-driving cars and robotics, as well as the many industries these technologies impact.”

Demand for data centre products to continue, says Huang

Gaming revenues grew by 31% to $6.2 billion during the quarter, while data centre sales also increased by an impressive 83% to $3.8 billion, boosted by artificial intelligence-related sales to cloud computing clients. Huang expects this strong demand for its products to continue.

During the quarter, the company also paid out $2.1 billion to investors in share buybacks and dividend payments. Management plans to make a total of up to $15 billion of share repurchases in the current financial year.

Nvidia’s outlook dampened by Ukraine war and China lockdowns

However, the bumper profits were overshadowed by softer outlook guidance. Nvidia expects revenues to dip to $8bn for the second-quarter, plus or minus 2% - which is lower than analysts previously expected.

The company’s chief financial officer, Colette Kress, said on the conference call that the Covid-19 restrictions in China have hit demand for its products. “You have very large cities that are in full lockdown,” she said. “So it’s impacting our demand.”

Other companies, such as Cisco Systems and Applied Materials Inc, have also reduced their earnings guidance due to the Covid lockdowns in China.

Nvidia also anticipates taking a $500 million hit to sales from its withdrawal from Russia. The market previous accounted for 2% of its sales.

Nvidia shares have had a torrid time of it in the past few months, thanks to the general flight from technology stocks. The shares have almost halved from a high of $282.5 in March to just $169.75.

The stock may continue to take a short-term hit from the Ukraine war and Covid lockdowns in China. However, with strong demand for its products, at these levels, the shares are worth buying.

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*Based on revenue excluding FX (published financial statements, June 2021).