Analysis: NVDA

Portfolio holding Nvidia (NVDA) reported its April quarter results on Wednesday evening. Revenue soared 46.4% year over year to $8.29 billion, besting the $8.09 billion consensus, while EPS for the quarter clocked in at $1.36, $0.07 per share ahead of the consensus forecast.

Data Center revenue climbed 83% YoY to $3.75 billion while Gaming revenue rose 31% YoY to $3.62 billion. Professional Visualization revenue grew 67% YoY to $622 million while the company's Automotive and Robotics revenues fell 10% YoY to $138 million.

Those positives were overshadowed by the company's soft guidance, which it chalked up to the lack of Russia data center related revenue, roughly $100 million, and expected declines in its Gaming business and China lockdown supply issues to account for $400 million. In total, Nvidia sees those factors hitting its revenue by $500 million in the current quarter, leading it to guide July quarter revenue to $7.94 billion-$8.26 billion vs. the $8.44 billion consensus.

Here's the thing, though: That revised guidance, which arguably the market has been expecting given the growing number of comments particularly about the impact of China's lockdown, still points to 22%-27% top-line growth year over year. In other words, Nvidia continues to benefit from strong demand across its end markets, especially data center, a market we know is seeing incremental capital spending. Some will no doubt argue Nvidia would have guided revenue for the July quarter above expectations if not for those factors, but we're not going to play "could have been."

Instead, we'll recognize the near-term headwinds that are likely to restrain Nvidia's business and the shares, and as a result, drop our rating to Two from One. We'll also cut our price target on NVDA to $225 from $300. We'll look to revisit our rating as we get clear signs China's lockdowns are easing and production is ramping back toward normalized levels.

In terms of potential downside, it's likely to be limited given the favorable outlook for data center demand in the coming quarters as well as the Nvidia's increased and extended share repurchase program. Alongside its April-quarter results, Nvidia announced it has upsized that program to a total of $15 billion through December 2023. Given where the stock currently trades this is a program that is likely to be widely used and provide some support.

Action Alerts PLUS is long NVDA.