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NVIDIA - Q4 sales drop 21% and interest building in AI

NVIDIA's fourth quarter revenue of $6.1bn was down 21% on the same period last year.

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NVIDIA's fourth quarter revenue of $6.1bn was down 21% on the same period last year. This was slightly above market expectations. The largest division, Data Centers, increased sales by 11%, driven by demand from cloud providers in the US. Another bright spot was automotive, up 135%.

But this could not offset a 46% decline in gaming revenues. NVIDIA pointed to weak global demand and an effort to reduce distributor stock levels as causes of the fall.

Lower revenues, combined with lower gross margins and a 23% increase in operating expenses contributed to a 40% reduction in underlying operating income to $2.2bn.

Free cash generation rebounded from the outflow seen in the third quarter but at $1.7bn was down 36.5% year on year.

In the first quarter of this financial year, NVIDIA expects revenue to be within 2% of $6.5bn.

Shareholder pay-outs totalled $1.15bn, taking the total to $10.4bn for the full year.

The shares rose 8.9% in after-hours trading.

View the latest NVIDIA share price and how to deal

Our view

Last year saw a period of stellar growth come to an abrupt halt. Growth has been held back by a poor performance in gaming, which up until 2022, was its largest revenue generator. Demand for personal computers has plummeted, a trend that has worsened of late.

The effect on performance has been amplified due to high stock levels amongst its customers. This has hit profits hard, and with a depleted cash pile, it's going to be hard to maintain the high level of shareholder returns seen of late.

However, the company's business model is pivoting away from gaming, with a focus on Artificial Intelligence (AI). The emergence of the ChatGPT intelligent chatbot last year has driven a surge of interest in AI. ChatGPT runs on NVIDIA chips, 10,000 of which were used to train the programme to converse with its users, write content, and even computer programs.

CEO Jensen Huang sees the recent breakthroughs in AI as an inflection point for broad adoption across every industry, and he may well be right. While historical focus has been on hardware, there is also a software element to the AI story. NVIDIA's enterprise software accelerates the development of AI applications, as well as offering off the shelf 'pretrained' models. Software revenues are currently small, but we see this as an opportunity to increase recurring revenues.

NVIDIA's seen a surge of interest in its AI offer in recent months. It's leveraging its relationships with all of the major cloud service providers to make the supercomputers required to train AI models more accessible. Now users can do this just by opening an internet browser. That convenience should help generate more revenue from the 10,000 AI start-ups its working with. But it's also looking to bring larger customers on this journey, partnering with Deutsche Bank to develop AI driven applications for use in financial services.

We see NVIDIA as a frontrunner to capitalise on the AI frenzy but caution that the speed of client take-up remains to be seen. As with all novel technologies, companies may prefer to dip their toe before committing to big spending programmes.

Whilst AI is the area management are shouting loudest about, it's also encouraging to see signs of a recovery in gaming revenues and we're hopeful this can continue. NVIDIA has launched a new generation of gaming chip and recently a game streaming service. What's more it's partnered with Microsoft to bring games such as Call of Duty to the platform.

With a valuation now well above the long term average the market certainly seems to share NVIDIA's renewed optimism, and with that in mind there's little room for any slip ups. Whilst fears of a global recession remain elevated there could be more volatility to come.

NVIDIA key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 23rd February 2023