Nvidia stock could pause as server growth slows down

On the anniversary of the earnings report that jump-started Nvidia Corp.’s AI-fueled boom, the chip maker is feeling the weight brought on by higher expectations.

Nvidia’s second-quarter results beat overall expectations Thursday, thanks to a boost in sales of its chips to digital currency miners. But Nvidia
 stock did not respond positively after the report, falling more than 6.5% in after-hours trading.

The culprit appeared to be the business that has shown the most progress in the past year, graphics chips designed for data centers. While that segment soared 175% from the same quarter a year ago, it grew only 2% on a sequential basis to $416 million.

While that beat average analyst estimates of $401 million for the server business, it didn’t reach the whispered expectations on Wall Street. Bernstein Research analyst Stacy Rasgon said he believed some investors and buy-side analysts were looking for sales in the data-center business of about $430 million.

“I am sure the buy-siders were hoping for more,” Rasgon said in an email.

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Questions about the company’s growth in data centers made up an outsize portion of Nvidia’s earnings conference call Thursday, including the first question, in which an analyst pointed out that, “this time, the growth was somewhat more modest.”

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Nvidia co-founder and Chief Executive Jensen Huang explained that the quarter represented a transition period ahead of the launch of a new server chip called the Volta.

“I thought we did great,” Huang said of the server business. “We almost tripled year-over-year and we ramped Volta into volume production.”

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If Nvidia expects Volta, which Huang unveiled to fanfare at its annual developers conference, to be a big revenue driver in the current quarter, though, it didn’t show in the company’s forecast. Nvidia’s outlook for total third quarter revenue of $2.35 billion, plus or minus 2%, reflects annual growth of 17.5% at the midpoint, down from the company’s stunning 54% revenue growth in the fiscal third quarter last year.

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Therein lies the problem for Nvidia: The company’s major efforts in new markets beyond its core gaming business have attracted investors looking for big growth, but it will be hard to continue posting those growth rates as Nvidia laps the heady increases that began a year ago. Last year, Nvidia was the top-performing stock in the S&P 500 index
 , soaring 224% and some traders and technical analysts have warned that the stock was showing signs of a peak.

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With those doubts combining with shrinking growth rates a year out from Nvidia’s big boom, we could see the stock price pause until, or unless, Volta and the company’s autonomous-driving efforts show fruit.

View more information: https://www.marketwatch.com/story/nvidia-stock-could-pause-as-server-growth-slows-down-2017-08-10

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