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Nvidia (NASDAQ:NVDA) shares slumped in early trading on Thursday after the semiconductor company posted fourth-quarter earnings and gave first-quarter guidance that handily beat expectations, but concerns about gross margins may keep a lid on shares.
Bank of America analyst Vivek Arya reiterated his buy rating and $375 price target, noting that gross margins guidance was flat, likely due to “mix in other segments (gaming) while data [center] mix will actually improve.”
In addition, Arya said that a “modest beat” in data center revenue of $100 million compared to $200 million last quarter was likely due to “networking supply constraints.”
“Meanwhile, we see growing investor anticipation/interest ahead of upcoming 22-Mar analyst day where NVDA could provide more details on its software/Omniverse strategy,” Arya wrote in a note to clients. “Overall we raise FY23/24E EPS by 9%/13% to $5.64/$7.06, and raise long-term CY25 EPS power to $11 from $10 prior.”
Nvidia shares fell more than 7% in early trading to $245.61 on Thursday on heavy volume.
The Jensen Huang-led Nvidia said it earned $1.32 per share on $7.64 billion in revenue during the period ending January 30, as revenue from Gaming, Data Center and Professional Visualization achieved a record during the period.
During the period, gaming-related revenue rose 37% year-over-year to $3.42 billion, while data center revenue surged 71% year-over-year to $3.26 billion. Revenue attributed to professional visualization rose 109% year-over-year to $643 million.
A consensus of Wall Street analysts expected Nvidia to earn $1.22 per share and generate $7.43 billion in revenue.
For the first quarter, Nvidia said it expects revenue to be $8.1 billion, plus or minus 2 percent, with GAAP and non-GAAP gross margins at 65.2% and 67%, respectively, plus or minus 50 basis points. Analysts were expecting $7.29 billion in sales for the quarter.
It expects GAAP operating expenses during the period to be $3.55 billion, including $1.36 billion for the Arm-related write off.
Arya also pointed out that the world is “still in early days” of AI adoption with a multitude of use cases, “which suggests long runway for 30-40%+ growth in NVDA’s data center [business].”
Nvidia also has more than $20 billion in cash and with free cash flow margins at 30%, it has “ample flexibility” for strategic deals now that the Arm saga is gone, even though Huang said the company gave it its “best shot” to buy it.
On Wednesday, Nvidia announced it had signed a deal with Jaguar Land Rover to provide software for next-generation vehicles.