Nvidia earnings: 'We’re getting closer' to the gaming bottom, analyst says

Stifel Analyst Ruben Roy joins Yahoo Finance Live to discuss Nvidia earnings, the gaming slowdown, crypto mining, and the outlook for chip sales.

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- Chip giant, Nvidia, is slowing the pace of its hiring after mixed third quarter results. This comes amid a slowing PC gaming market. Analysts often look to Nvidia to check the health of the tech industry because it sells chips and software to so many PC-makers and cloud-providers.

Staples Applied Technology Analyst, Roy Ruben, joins us right now to talk us through these results. Roy, thanks for being here. As we look at these numbers here, it seems like a lot of folks have focused on the gaming piece, because that's a big part of Nvidia's business, and whether it is indeed bottoming or not. Where do you stand on that question?

RUBEN ROY: Yeah. Hi, thanks for having me. And the gaming is certainly a big piece. It's been a little bit of a drag on the business as Nvidia is trying to clear inventory overhang post the crypto bust. And on the call last night, management said that, hey, we're approaching the bottom. They didn't give us a definitive answer as to whether or not that bottom would be coming in the fiscal fourth quarter, which ends in January or not.

But the good news is that we're getting closer, and Nvidia has been under shipping through demand for two quarters now. The gaming segment was down 50% year-over-year for this third quarter that was just reported. We have another 50% decline coming up in our model for Q4. So we're getting close, which is the good news. And once we do that, we should start to see some recovery in the business.

The question is what the true run rate for the gaming segment is on true gaming demand ex-crypto. And so, I think that's what investors are going to focus on going forward, and I don't think we're to get to the answer or the bottom of that until we get out into 2023.

- Ruben, my apologies. Ruben Roy, excuse me very much. I apologize for that. I'm sorry.

RUBEN ROY: It happens all the time.

- You guys jump in.

- Ruben, while we have here, I mean, one huge thing is when that demand for gaming will kind of normalize or stabilize. What's your time frame look like for that?

RUBEN ROY: I'm thinking we'll start to see some real sell in sell through equalization as we get out into the July quarter, and that's in our model when we have the gaming business starting to grow on a nice year-over-year basis again. Here, again, the good news is that Nvidia is on a new product cycle.

They just launched a new chip architecture called Ada Lovelace that has some really, really great features. There's new games that are coming out that take advantage of those features. So I think the upgrade cycle is going to happen, but, again, it's a question of how long it takes to get through some of the inventory that built up in the channel as we went through the crypto boom-and-bust over the last, I would say, 12 to 18 months.

- Now, Ruben, you mentioned new chips from Nvidia. A couple days ago, AMD came out with some new chips that are getting some rave reviews. As you look to next year, who has the better chips and who is likely to see the faster, I guess, reacceleration in sales and earnings?

RUBEN ROY: Right. So, absolutely, AMD's been doing really well. There's two parts of the business that we're looking at here. There's the pure gaming segment where Nvidia's been ahead for a long time. I think in that segment, AMD is starting to make some strides and starting to catch up, potentially, a bit.

Certainly, we think that Nvidia is going to continue to hold the majority of the high end of the gaming segment, and we'll see if AMD can come through and start to nibble away in a little bit of a share in the low to mid-range. The data center segment is really where the, I think, investor interest is more keyed into.

And there, Nvidia certainly has a big, big leadership position in GPU acceleration. They've got this new chip architecture out called Hopper. The H-100 chips have started to ship into their platform partners, like the Dells and Lenovo's of the world. Nvidia is going to start to ship that platform out to the cloud service providers in Q1.

And there, Nvidia is really built up a great ecosystem, enterprise software stacks, data center, AI software that's very helpful as the cloud service providers, and other enterprise Fortune-500 companies, are trying to figure out how to monetize AI. And I think Nvidia is going to stay ahead of competition, like AMD. Intel is trying to get involved, and we'll see how that goes. But, certainly, we believe that Nvidia is in the driver's seat in terms of those areas of the business.

- And Ruben, just to zoom out a little bit, of course, we heard from Micron cutting its production targets. We've heard from some of the other chip-makers in their earnings thus far this season. As you look in the ensemble of earnings now, where are we in the chip cycle? What do we know about how bad, what seems to be a glut right now, is going to be and how long it's going to last?

RUBEN ROY: Yeah, that was a surprise yesterday for Micron because we think we're getting close to the PC bottom. We just talked about gaming and potentially bottoming for Nvidia getting into 2023. We've seen a lot of weakness in handsets, Chinese handsets, and even Apple having some issues with lockdowns still happening in China.

So I think a lot of the cuts that investors were expecting across those end markets have happened, maybe have another quarter or two, but certainly investors look to a bottom in the space ahead of the last cut. So I think we're getting close. That's the good news. There are some markets, though, like industrials and automotive where we haven't seen major cuts yet. And, certainly, data centers are also on the minds of investors as to whether or not that's going to be an area that we see some capital spending reductions, as we think about 2023 and potential recession risk, et cetera.

So there's still some time ahead. I would say that investors, especially with the way the Semiconductor Index, the companies have acted this year, the stocks, I think, are still down around 40%. And so, a lot of the bad news is in the numbers. I think once we get a little more visibility as we get into the end of this year and we start to figure out, hey, the last cuts are coming across a lot of these end markets, I think it's going to be a lot easier for investors to start to pick winners.

The Micron news just tells us that, hey, things are still pretty tough out there, but the good news is Micron, and others, are cutting capacity, and that's going to help clear inventories and things like that as we think about a recovery as we get through 2023.

- Ruben, I only got about 30 seconds here, but I'm glad you brought up spending. It seems like we've entered into a season of cost restructuring, or spend management here. So when I hear about things like the autonomous vehicle robotics, Omniverse, R&D that's going to be taking place, when is that actually going to pay off?

RUBEN ROY: A lot of those things are still out there, but the good news is from a design activity perspective, qualitatively, every discussion we have with component-providers and customer supply chain participants indicates to us, at least for now, that R&D budgets are still hanging in there, and there's still a lot of design activity in those areas that you mentioned.

So whether it's Omniverse/Metaverse, metaverse autonomous driving, factory automation, robotics, et cetera, we're seeing a lot of activity. And when are those things going to pay off? I would say this is a driver of the semiconductor industry over the next five to 10 years. Certainly, we're seeing an increase in content for the semiconductor component providers, and I think that's a trend that is here to stay, and it's going to drive better growth as we get through some of these down cycles, which, again, we think is going to start to happen as we get through 2023.

- Ruben, really helpful context on all of this, not just Nvidia, but the big picture for the chip industry. Ruben Roy of Stifel, appreciate it.

RUBEN ROY: Thanks. Thanks for having me.