- Reports Q1 2022 results on Wednesday, May 26, after the close
- Revenue expectation: $5.39 billion
- EPS expectation: $3.28
The strong rebound in NVIDIA (NASDAQ:NVDA) shares from the March dip suggests that one of the largest U.S. chipmakers is successfully navigating the supply constraints which are choking growth in the overall industry.
If that’s the case, the company will have good numbers to share with investors when it reports its latest earnings on Wednesday.
The industry-wide chip shortage has caused prices to rise for some products, while creating delays in filling orders for others. Auto makers are the most affected, as the acute supply shortage of chips they use in their vehicles have forced some to idle their factories.
Behind this sudden shift—from a robust growth scenario to supply constraints—is the pandemic-fueled demand for everything, including cell phones, laptops, cloud computing and gaming consoles.
California-based NVIDIA is a provider of the key components required for all the sector's large, high-growth technologies, including cloud-computing, artificial intelligence, robotic automation, mobile computing and the internet of things.
NVIDIA outsources its production to Taiwan Semiconductor Manufacturing (NYSE:TSM) and Samsung Electronics (OTC:SSNLF), which are struggling to fulfill orders. NVDA's Chief Executive Officer, Jensen Huang, told investors in February that it has enough supply to grow throughout this year, and some segments, like data centers, won’t be hurt by chip shortages.
Data Center Slowdown
Besides supply constraints, investors will also be focusing on demand trends during the second half of 2021, as the U.S. targets full reopening of the economy this summer. If that happens, it could normalize demand for chips used in gaming and data centers after the pandemic-driven boom.
Cloud providers, such as, Google (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN), use NVIDIA graphics chips to help power some of their most widely used services on the internet. That business is cyclical and could be entering a slow patch after robust activity during the past year.
Intel (NASDAQ:INTC), the biggest chipmaker, said last month that its Data Center Group generated first quarter sales that fell 20% from a year earlier and missed Wall Street estimates.
Still, NVIDIA remains a strong chip name to hold in a long-term portfolio. The company has the right product mix, which puts it in a position to produce growth in the years to come.
The chipmaker continues to see a surge in orders for PC gaming gear from consumers stuck at home because of the pandemic and looking for entertainment. NVIDIA’s graphics chips are also important components in machines that run the code needed to create Bitcoins and other cryptocurrencies. The price of Bitcoin has been highly volatile in recent months.
Analysts at Oppenheimer reiterated their outperform rating on NVDA before the earnings, saying they see “upside to consensus.” That note said:
“We see broad upside (vs. original $5.3B outlook) led by gaming. Crypto alone contributes $100M of upside. We see upside again limited by supply tightness. Constraints likely persist into the end of year, though gradual supply improvement supports continued Q/Q growth.”
Bottom Line
NVIDIA shares may come under pressure if the company sees slowing demand for its data center products amid supply constraints. But any post-earnings dip should be taken as an opportunity to build up a long position in this stock, which has proven to be a solid pick due to its strong growth potential.