NVIDIA: AI and Gaming Lead The Way Forward

Shares of NVIDIA NASDAQ: NVDA are rocketing higher after some surprisingly good news. The company reported better-than-expected Q4 results led by AI and gaming. The recovery in gaming is a real surprise because all signs from within the industry are that slowing is the theme of 2023.

This means for NVIDIA investors that shares are up more than 10%, confirming the reversal in price action and a continuation of the underlying trend. The risk for investors is that price action will pull back to close the significant gap caused by the surge. In this scenario, the rally in NVIDIA shares is still in play, but it may be another few months to 2 quarters before the stock sets another new high. 

"AI is at an inflection point, setting up for broad adoption reaching into every industry,” said Jensen Huang, founder and CEO of NVIDIA. “From startups to major enterprises, we are seeing accelerated interest in the versatility and capabilities of generative AI. We are set to help customers take advantage of breakthroughs in generative AI and large language models. Our new AI supercomputer, with H100 and its Transformer Engine and Quantum-2 networking fabric, is in full production. Gaming is recovering from the post-pandemic downturn, with gamers enthusiastically embracing the new Ada architecture GPUs with AI neural rendering.”

NVIDIA Results Impress 

NIVIDIA’s Q4 results are impressive so much for strength as for the indications of a rebound in business. The company’s $6.05 billion in revenue is down 21% compared to last year and only beat the Marketbeat.com consensus by 50 bps.

The reason for the beat is the more important factor as Gaming and Pro-Visualization, down 46% and 65% YOY, grew double-digits sequentially. The Datacenter segment declined sequentially to offset some of the strength but is still up 11% YOY while the Automotive and Embedded segment saw robust growth on a YOY and sequential basis. 

Likewise, the margin shows the sequential improvement that suggests the bottom is in for business. However, the gross margin is down more than 50% YOY, so the 970 basis point of sequential improvement could be better. On the bottom line, the GAAP and adjusted EPS beat the consensus but again are down YOY by high single digits.

The takeaway is the business is recovering, but the recovery is just begun; if these trends continue in 2023 then good; if not this stock could be in for another correction. 

The guidance is iffy. The company expects to see a sequential improvement in revenue in Q1 2023 but the YOY decline will hold steady at 21%. The margins are expected to be flat to slightly higher, which is good but not enough to sustain a rally. 

"In short, this update was better than feared, perhaps indicating the worst for NVIDIA’s business is past," Susquehanna analyst Christopher Rolland wrote in a note to clients.

The Analysts Drive NVIDIA Higher 

At least 18 of the 37 analysts with current ratings on NVIDIA have come out with commentary since the Q4 release. This activity includes 1 upgrade and 17 price target increases that has the Marketbeat.com consensus firming after a year of decline. The consensus is about 15% above the current price action, which may lead this market to a new high. If not, this stock could be trapped in a consolidation range below $235 until the next earnings report.