Nvidia Stocks Fall on Weak Game Sales: Is It Time to Sell These Growth Stocks?

nvidia (NVDA -6.30%) it is a powerhouse in the data center and gaming industries, and investors expect strong financial results on a consistent basis. Unfortunately, the chipmaker released its preliminary second quarter earnings report on Monday and the results were disappointing.

Nvidia had previously forecast $8.1 billion in total revenue, but that figure has dropped to $6.7 billion, reflecting a 19% decline compared to last quarter and just 3% growth in revenue. comparison with last year. Management primarily blamed weaker game sales, citing a difficult macroeconomic environment, but Nvidia noted that supply chain disruptions were also a drag on data center revenue.

The company is scheduled to release its official earnings report on August 24, so investors are unlikely to get any additional context for a few more weeks. But Nvidia shares fell as much as 9% on Monday morning in response to the news.

Is it time to sell?

The panorama

Nvidia shareholders (myself included) were understandably disappointed by the preliminary earnings report, but it’s important to keep the big picture in mind. Nvidia is the gold standard in gaming and 3D graphics. The company captured a whopping 78% market share in discrete graphics processing units (GPUs) during the first quarter, and Nvidia owns more than 90% of the workstation graphics market.

The company is equally dominant in the data center, where its high-performance networking chips and solutions are used to accelerate complex workloads such as artificial intelligence (AI), data analysis and scientific computing. Nvidia has over 90% of the market share in the supercomputer accelerator space and has consistently achieved top results in the MLPerf benchmarks, a series of tests that measure hardware and software training and inference performance. of AI in language processing, objection classification and recommendation systems. and other use cases.

Better still, Nvidia has reinforced its leadership in the gaming and data center markets with a strong portfolio of subscription software. For example, AI Enterprise is a set of tools that helps developers build, deploy, and manage AI applications. Nvidia also offers frameworks that accelerate software development for specific use cases, such as Isaac for AI robotics applications, Clara for AI healthcare applications, and Drive for autonomous vehicle applications.

Likewise, Omniverse is a 3D simulation and design software suite. It enables creators to build virtual worlds in a collaborative environment and empowers engineers to generate synthetic data for the purpose of training autonomous robots and vehicles.

Those software products complement Nvidia’s hardware, making its computing platform a more complete solution for creative professionals, researchers, developers and data center operators. In addition, software revenue tends to generate higher margins than hardware revenue, and CFO Colette Kress recently told investors, “As new products ramp up and software becomes a larger percentage of revenue, we have opportunities to increase gross margins in the longer term. That bodes well for the future.

A strong product roadmap

The Nvidia brand has become synonymous with accelerated computing and ultra-realistic graphics, and the secret to that success is an enormous capacity for innovation.

Earlier this year, the company released its latest GPU architecture, Hopper, which offers an order of magnitude performance boost over its predecessor, Ampere. Nvidia has also started producing Orin, a system-on-a-chip that will serve as an AI supercomputer for smart and autonomous vehicles. More than 25 automakers have adopted the technology, including BYD, lucid groupY child — and Nvidia currently has $11 billion in its automotive portfolio, up from $8 billion last year.

More broadly, Nvidia has a strong product roadmap that should keep it at the forefront of the computing industry. In early 2023, the company will launch the Grace central processing unit (CPU), a data center server chip designed to accelerate high-performance computing and AI workloads. Management says the Grace CPU will provide better performance and twice the power efficiency of the best server chips on the market today.

In short, Nvidia benefits from a strong position in various mass markets, from gaming and graphics to data centers and high-end vehicles. To that end, management places their market opportunity at $1 trillion.

With that in mind, temporary headwinds like high inflation and supply chain challenges are no reason to sell the stock. In fact, since the stock is trading at 15 times sales (a discount compared to the three-year average of 20 times sales), investors should consider buying some shares of this growth stocks This day.

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