In less than a week, on Wednesday, February 22, semiconductor giant Nvidia (NASDAQ:NVDA) is due to report its fiscal Q4 2023 earnings results. Investors have been bidding up Nvidia stock in anticipation of good numbers, with gains approaching 54% so far this year.
But “good” is apparently in the eye of the beholder. According to the opinion of most analysts, Nvidia is heading for something of an earnings trainwreck next week — sales down 21% year over year at just $6 billion, and profits crashing nearly twice as hard, from $1.32 per share to just $0.81, a 39% decline.
Deutsche Bank analyst Ross Seymore is representative of this analyst consensus — and he’s not at all enthused by Nvidia’s stock price.
In a note out Wednesday, Seymore explains that on the surface at least, Nvidia’s Q4 report should look “solid.” The sell-down of excess Gaming chips inventory is nearly complete, at the same time as investor enthusiasm for ChatGPT and other artificial intelligence plays picks up, giving Nvidia’s Data Center business a lift.
True, Nvidia rivals AMD and Intel have both guided lower for their own data center revenues in Q1, predicting revenues to fall between 15% and 20% from Q4 levels. But with an arms race brewing among companies hoping to dominate artificial intelligence — Google, Microsoft, Baidu, and Alibaba among them — it makes sense that demand for the kinds of chips that power the servers than make AI possible should rise. Indeed, it’s this very enthusiasm for AI-related stocks, says Seymore, that lies behind Nvidia’s rapid stock price appreciation in the early weeks of 2023.
But that could be a risk.
Indeed, Seymore remains unconvinced that Nvidia stock is a “buy.” To the contrary, he rates the stock a “hold” and assigns Nvidia only a $170 price target that implies the shares are as much as 34% overvalued after their run-up.
As the analyst explains, Wall Street is probably right to expect a $6 billion revenue quarter out of Nvidia. Comparing this current quarter to Q3, Seymore sees very little movement out of Nvidia, with both Gaming and Data Center revenues improving at most 1% quarter over quarter, and only Automotive chip sales showing any real signs of life — up perhaps 20% sequentially.
Gross profit margins will budge hardly at all, rising only 10 basis points sequentially to 66%. Modeling some small improvement in operating spending, though, Seymore thinks earnings might barely exceed consensus expectations, and come in at $0.82 per share — a penny more than everybody else thinks.
The real news next week, therefore, may be not “earnings” but “guidance” on future sales and earnings. Seymore sees revenues continuing to sink year over year — down 24% — but rising 5% sequentially, to $6.3 billion. Surprisingly, this would actually be a bit less than the $6.4 billion in sales that Wall Street is predicting, with Gaming starting to grow again (up 16%) but Data Center still in the dumps with only 1% sequential growth.
On the other hand, Seymore says profit margins should be good enough to deliver a second earnings beat for Nvidia, predicting an $0.89 per share profit where the rest of the Street sees only $0.86.
For a company like Nvidia, though, “beats” of just $0.01 (this quarter) and $0.03 (next quarter) may fail to impress investors very much. With Nvidia stock now looking richly priced again after its run-up, Seymore’s best advice is for investors to hold and wait for better prices before buying in.
Overall, based on 19 Buys, 5 Holds, and a single Sell, Nvidia has a Moderate Buy consensus rating. However, as is increasingly common in the current market, Nvidia, as mentioned, surged 54% this year, so price targets have been left eating dust. Therefore, the average price target of $212.04 indicates possible downside of ~6%. (See NVDA stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
