This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Throughout 2022, one of the industries that has been affected the most by supply chain disruptions and inflation is the semiconductor industry. As if navigating these economic headwinds weren't challenging enough, the federal government recently imposed restrictions on the sale of chips designed by the likes of market leaders Nvidia (NASDAQ: NVDA) and Advance Micro Devices, Inc.(NASDAQ: AMD) to China and Russia, citing national security threats. This news came one week after Nvidia's lackluster second-quarter fiscal 2023 results.
The company's earnings flop and the new sale restrictions led some investors to dump Nvidia stock. As a result, Nvidia plummeted to a new 52-week low. While the company seems to have a mountain to climb, there are several reasons investors may want to take a second look at Nvidia. One of the most interesting aspects of semiconductors in general is how central the products are to power industries such as cryptocurrency, big data, and gaming. Despite subpar results in its latest earnings, Nvidia has several tailwinds that could propel the company forward in the long run.
Peeling back the onion
Nvidia reports its revenue in two primary segments: graphics and compute and networking. For the second quarter (ended July 31), Nvidia reported $2.8 billion in graphics revenue, which represented a 28% decline year over year (YOY). By comparison, the company's compute and networking segment generated $3.9 billion in quarterly revenue, up 50% YOY. Given the disparity between these two primary segments, prudent investors may want to take a deeper dive into Nvidia's five market platforms, which combine to form the two main segments.
The table below illustrates Nvidia's five market platforms and the respective growth profile of each:
| Market Platform | Q2 FY23 Revenue | YOY Change |
|---|---|---|
| Gaming | $2.0 | (33%) |
| Data center | $3.8 | 61% |
| Professional visualization | $0.5 | (4%) |
| Automotive | $0.2 | 45% |
| OEM and other | $0.1 | (66%) |
Investors can see that Nvidia's gaming and data center businesses combine to form the majority of the company's revenue. The data center business grew by a whopping 61%, reaching $3.8 billion in revenue. According to management, the increase in data center revenue was driven by the company's hyperscale business doubling. Hyperscale data centers are much larger than traditional data centers and typically outperform them because of the volume of data they can process and the superior storage services they can provide. As corporations of all sizes become more reliant on data to make decisions, it is not surprising to see Nvidia benefit from this tailwind.
It is important to note that Nvidia's management explained to investors that while hyperscale customers increased in North America, the company's business in China slowed down significantly due to lingering economic challenges from the pandemic.
While Nvidia is far from the only technology company that faced revenue challenges in certain geographic regions, the company may be facing a longer period back to robust growth -- alongside other tech companies -- given the federal government's recent mandate prohibiting the sale of chips and data processing products to China and Russia. While this might spook some investors easily, we must remember that Nvidia is a global organization with several different operating segments. Although its hyperscale data center business is likely to face some near-term headwinds, the company has several other end markets it can benefit from.
Is gaming just a fad?
Nvidia's gaming segment generated $2.0 billion in quarterly revenue, down 33% YOY. The gaming segment is interesting because it serves as the nucleus to so many other industries, such as personal computing, graphics cards, and cryptocurrency. In fact, one of Wall Street's most highly regarded technology analysts, Gene Munster, recently said during an interview with CNBC that for Nvidia's business, the term "gaming" is code for "crypto."
Although the diminishing enthusiasm for crypto has affected the sale of high-end computer hardware, it is important to understand that the economic challenges companies and investors alike are facing will eventually subside. Stated differently, investors should use a long-term time horizon when analyzing an investment. While the company's gaming segment has slowed down materially, it is highly unlikely that the crypto market or demand for graphic processing units (GPUs) has been permanently destroyed.
Year to date, leading crypto tokens Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) are down 60% and 64%, respectively. Given the volatility of the stock market and the general economic outlook, many investors have trimmed positions in equities and alternative assets such as cryptocurrency in an effort to flock to cash as a safe haven.
Keep an eye on valuation
The entire year of 2022 has been rough for Nvidia. Earlier this year, the company scrapped its plans for its proposed megamerger with competitor Arm Semiconductor. Additionally, economic conditions in China due to the pandemic have affected the company's data center business. Moreover, the federal government has banned Nvidia from selling certain products to China and Russia, citing national security concerns. Lastly, the cratering crypto market has significantly affected demand in Nvidia's gaming division. All of these hiccups have contributed to a massive sell-off, with the stock hitting a 52-week low last week.
But even with all of that said, some on Wall Street remain bullish. Mizuho analyst Vijay Rakesh recently reiterated a buy rating on the stock, citing strong demand in the hyperscale business. Additionally, several investors on a CNBC panel recently claimed that given management's weak guidance for the next quarter, the stock is likely not headed higher anytime soon. For this reason, Nvidia could soon be a compelling buy.
The most prudent action for investors is to assess the company's next-quarter results and pay close attention to management's guidance as we head into next year. Should Nvidia stock continue to slide over the next few months, investors with a long time horizon may have a lucrative chance to lower their cost basis before the stock rises again.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
