Nvidia earnings preview

With the implosion of cryptos, mining demand for graphics cards has weakened. But it looks like the gaming outlook isn't all that certain, either.

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The market is changing

In what might turn out to be a bad sign, two investment firms downgraded their price outlook for Nvidia just before the company reported Q1 earnings. Both cited the gaming market as potentially not being able to catch up to the better performance expected in other areas. However, both firms reiterated their buy rating, suggesting that Nvidia might be in for a short rough patch and then come out better in the long term.

The bulk of the company's revenue comes from the data centre division (43% during the last quarter), which has shown resilient growth even as people move back from working at home. However, one of the issues the stock price faces is a P/E ratio of over 43, which could depress the price in an increasingly tight monetary policy environment. And not everyone thinks the focus on data centres is a good idea, even though revenue in that division is expected to rise 75% over last year.

It's about the supply chains

A potential worry is how the lockdowns in China could have affected the company. Nvidia's quarter ends one month later than other tech firms like Intel and AMD, which means more of the covid response in China could be seen in the upcoming earnings. Furthermore, the company could provide a less optimistic outlook for the second quarter for this reason.

If all results come in within expectations, investors could turn their focus on the company's ambitions. Nvidia hasn't let the cash generated during the pandemic languish in its coffers, and has embarked on an ambitious growth program targeting entry to the chip market. But that also means a substantial investment. Nvidia guided Opex of $1.6B this quarter, and could increase that in the next quarter.

Out of bear market soon?

It’s not the first time a bullish divergence makes an appearance but the second time makes a stronger case for a reversal if not a short-term rally up. Frankly, last time an identical signal appeared between $210 and $206, the stock soared to $291, but it was not in bear market; it entered in April.

In the short-term, prices could form another low but unlikely to get past $150. There is strong support at $132 in case that happened. Inversely, the break of $183.95 and $206.10 would be an attempt to fill the $225-$241 gap formed on April 11. There, bulls will be likely given a chance to exit the bear market.

Source: Spreadex trading platform

Key takeaways

Despite being downgraded Nvidia stock maintains its buy rating. Recent expectations in the gaming and data centre areas indicate a short-term bump in the road. The stock’s P/E ratio is also low, and it may distort the stock’s price further.

Investors are worried Nvidia's earnings could be affected by the lockdowns in China. If everything goes according to expectations, investors can continue to focus on the company's plans for research and development as the firm is sitting on a lot of cash.