Nvidia (NASDAQ:NVDA) stock has recovered before Nvidia’s results have. NVDA stock has gained 82% just since June 3, but recent earnings reports don’t seem to support that type of optimism. In the company’s third quarter, for instance, revenue declined 5% year-over-year and net income fell 27%.
Of course, markets are supposed to be forward-looking — and in that context, the gains in NVDA stock make more sense. In a little over a year, Nvidia has dealt with the bursting of the “crypto bubble” and with a slowdown in data center demand. Both factors have wreaked havoc on the company’s numbers.
However, management has insisted for much of the last year that an uptrend was on the way in the second half of fiscal year 2020 (ending January). Q3 results were a step in the right direction, but next month’s fourth-quarter release will be key in proving that prediction correct. Rising confidence toward that outlook has been an important driver in the huge gains for NVDA stock so far. And, recent results from two fellow chip companies add to that confidence ahead of Q4 earnings.
Data Center Weakness
The biggest piece of good news in peer earnings is the strength in data center. That category has been notably, and surprisingly, weak through the first nine months of Nvidia’s FY2020.
Weakness in the gaming market, due to significantly lower cryptocurrency mining sales, has received most of the headlines. But data center revenue, according to the company’s most recent filing, has declined over 10% year-to-date.
That comes after stunning growth the previous two years, as data center sales increased over 250% between FY2018 and FY2020. The slowdown in the category was not expected, given improvements in artificial intelligence and revenue growth at cloud providers like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).
However, both Nvidia management and its numbers have suggested that demand simply saw a temporary pause. Data center revenue in the third quarter rose 11% quarter-over-quarter, for instance. And now results from Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD) add further evidence that the market is recovering.
Peers Show a Recovery
Intel’s results in particular show the improvement in data center demand. Revenue from that company’s Data Center Group (DCG) came in at $7.2 billion in the fourth quarter, up 19% YOY. Meanwhile, analysts were looking for growth of roughly 6%.
Those results are particularly important because Intel retains dominant share in the market. In fact, its DCG revenue for all of 2019 was $23.5 billion. Oppositely, Nvidia has generated data center sales of less than $3 billion over its last four quarters. Those figures are not necessarily apples to apples, but Intel still is the largest player in the space. Its results at the least show that demand continues to recover nicely.
Furthermore, AMD’s fourth-quarter report has some good news as well — although it doesn’t look like it. Revenue in AMD’s enterprise embedded and semi-custom segment came in well-below expectations. However, it’s not clear how much of the miss was driven by data center and that company’s Epyc chips for data center applications.
Analysts spent much of the fourth quarter conference call trying to ascertain how much revenue actually came from the data center business. And it’s likely that lower demand from gaming console manufacturers Microsoft and Sony (NYSE:SNE), ahead of new launches later this year, was a key factor in the weakness.
Meanwhile, AMD is a far smaller player in the segment. Any disappointment from that company is far less important than the strength showed by Intel. Overall, the market clearly has recovered — and that creates an opportunity for Nvidia.
Q4 Earnings and NVDA Stock
Collectively, Intel’s strength does create a real risk to Nvidia stock after earnings — which are likely to be reported mid-February.
Nvidia has to deliver impressive data center growth because market share gains are a key part of the bull thesis after the recent run-up. Indeed, AMD stock is sliding in pre-market trading Wednesday, due at least in part to a perceived miss from Epyc. So, if Nvidia underperforms Intel, investors will not react well.
However, Intel’s strength also creates an opportunity — particularly with Nvidia stock pulling back in recent sessions. Even with that decline, valuation is a bit of a question mark, as I detailed at the end of December. But this has been a market that focuses on growth over valuation — and Nvidia looks well-positioned for a beat with its fourth-quarter numbers.
AMD’s GPU (graphics processing unit) sales don’t suggest substantial market share gains, while Intel’s data center numbers mean Nvidia should show much-improved growth.
At least based on trading over the last seven months, an earnings beat should move NVDA stock higher. I wouldn’t expect another 85% rally in 2020, but sector earnings show there’s still a solid near- and mid-term bull case for Nvidia stock.
As of this writing, Vince Martin has no positions in any securities mentioned.