Nvidia earnings top estimates, shares slide on muted data center sales

Nvidia shares slip on its predicted decline in data center sales. Mizuho Analyst Vijay Rakesh joins Yahoo Finance Live to discuss the company’s latest earnings report.

Video Transcript

AKIKO FUJITA: Concerns about declining sales in its data-center business weighing on shares of Nvidia in the session. We're seeing that stock down about 1.3% right now. The company did post strong results in the third quarter, a record revenue for its gaming and data-center business driving overall revenue growth of 57%. But CFO Colette Kress warning those numbers for its data-center business are expected to fall this quarter.

Let's bring in Vijay Rakesh. He is an analyst at Mizuho. And Vijay, in looking at your notes here, you've got a price target of $605 on the share. It's trading at $529. How much of these moves that we saw-- initially, in the after hours, that stock was down as much as 3%. How much of this do you think is justified, given the strong quarter that the company still posted?

VIJAY RAKESH: Yeah, I think-- thanks for having me on. So especially on Nvidia, I think the reaction is kind of expected. The stock's up 100% year to date. It's had a pretty strong run here. But if you look at the core business for Nvidia, I should mention gaming up strongly, data center. The guide on the data center was modestly down, but that's primarily because a segmentation data center called Mellanox was supplying to Huawei. And Huawei had pretty much stopped ordering since September 15, the US restrictions.

But outside of that, the hyperscale data-center site continues to grow into the December quarter. So do we see Nvidia having a pretty strong long-term roadmap here, nearly dominating AI and training in the-- they're probably at 95% share of that market. And they've talked about $100 billion TAM in AI for the data center, just to hyperscale enterprise all those markets.

And if you look at graph, Nvidia is-- revenue's up today in that market. It's more $6 to $7 billion. So they're just scratching the surface, and yet still have a long way to go there. So some of it is probably a mixture of high expectations but shouldn't be unexpected, given how the stock has run this year.

ZACK GUZMAN: Yeah, and Vijay, I mean, as Akiko's highlighting, record revenue, obviously, clearly-- there's a lot to focus on on the positive side here for Nvidia. But when you look at the flip side you mentioned the issues there with Huawei and the data centers in the current quarter and how it might be softer than they expected, I mean, that's something we saw out of Intel as well. That stock got shellacked after their data-center group, which, you know, the revenue comes from enterprise's government customers, that was a 7% drop that they reported for the quarter. So how much of this is really industry-specific and kind of, you know, struggles across the board when we think about data-center revenue versus Nvidia-specific and what they may need to be improving upon.

VIJAY RAKESH: Yeah, sure. I think specific to Nvidia, this was primarily a Huawei issue. And Huawei had the US restrictions that went into effect September 15, and so they probably ordered well ahead of that. And so post-September 15, you just had an air pocket. So that's basically what's affecting their outlook. And as long as those US restrictions remain on Huawei, you know, you probably won't see them coming back.

But that said, the core data-center business, like I said, continues to grow into the December quarter. Where they had the exposure to Huawei was the interconnect side of the business with Mellanox.

Intel is a slightly different horse. I think what's happening there is obviously, they had the exposure to enterprise in government. We saw some declines. But they're also behind on the technology roadmap, especially with [INAUDIBLE] and [INAUDIBLE]. And they've been trying to play catch-up to A&D. And so they may be losing some share there as well.

So they really got hit not just the data-center guide, but you know, with lack of clarity around the manufacturing roadmap, with lack of, you know, [INAUDIBLE] to the product coming out to market on time. So there are some multiple things that they took hits on. Nvidia seems to be, by far, a much cleaner story, much stronger road map, much stronger market share, really not a lot of competition there, so.

AKIKO FUJITA: Vijay, you've got to buy rating on the stock. So clearly, you believe there's more upside. How much of that, though, factors in this $40 billion acquisition of Arm and the potential risk around regulatory approval? If you look at Chinese regulators, they seem to have already indicated they may not be comfortable approving the deal, largely because they're worried that if, in fact, Nvidia acquires Arm and that goes through, that could fall under US export controls.

VIJAY RAKESH: Yeah, you're right. I think when we look at the price target and where the-- what Nvidia is doing today, it really doesn't incorporate a lot of-- any of Arm, I should say. Arm definitely opens up a whole market for them. You know, obviously, there'd be challenges in integrating the two roadmaps between GPU at a really high processor and performance and energy, versus where Arm is, with-- considering more of a low-power TAM there.

But I think your points are well taken. I think there are some very strong-- big, regulatory challenges there. There are a lot of industry participants who don't like that position, who haven't share their roadmaps. And so we do think it's going to be a challenge to get that to the finish line. They, obviously, have to go through a lot of regulation hoops as well, so.

AKIKO FUJITA: Well, what kind of timeline are we talking about, then? When you look at something like a Qualcomm-NXP, that took about 18 months. Is that the kind of drawn-out process you're factoring in?

VIJAY RAKESH: I think they have laid out more of an 18-month process. Obviously, they have a lot more unknowns going into this, in terms of the US elections, the change in administration, you know, how hawkish is the new admin versus the prior one. We'll see how those play out. But you know, I think what we have seen kind of a-- more of a bipartisan, you know, stance, in terms of dealing with some of the IP theft or, you know, technology partnering [INAUDIBLE]. So I-- we'll see how this plays out. But they have-- they're confined on a multitude of fronts, not just regulatory approvals from China. But there's probably some entrenched other OEMs who are-- probably are not willing to share their roadmaps with the competitor as well, so.

ZACK GUZMAN: Yeah, we'll see what happens on the US side. As Akiko mentioned, there's still going to be the same questions on the Chinese side here when we think about that deal. But shifting over to the gaming side of the business, we've been talking a lot this year about pull forward in demand, you know, as we saw more purchases tied to the chip space here earlier in the year. What's your take on that and what, kind of, demand going forward looks like into, I guess, the December quarter and well into next year?

VIJAY RAKESH: Yeah, for sure, we definitely saw a pull-in across the work-from-home names the data-center side, as you saw both-- at least in the first half of the year, you saw both the cloud and the enterprise side start to spend to dev up their online channels-- you know, shop from homes, study from home, work from home, et cetera. So-- and you're seeing a pull-in into 2020, for sure.

I think going back into '21, there's probably-- you know, might be a little bit softer, in terms of that demand. But I think on the flip side, you probably start to see a lot of broadcast sports come back on. You start to see the Summer Olympics come back on. I think as you see ad spending come back, that will drive much bigger cloud capex. So we actually see cloud capex, just top down, continue to increase into next year, as just globally, you see a recovery across multiple industries.

And not just that, I think today, the demand seems to be the cloud, while the enterprise side, which is primarily, let's say, airline, retail, travel, restaurants, they're all weak. If we get through this-- you know, this COVID with some sort of vaccine, you'll probably see, next year, a recovery across that enterprise market, from retail, airlines, all those leisure markets that got hit. That will drive, again, data-center demand.