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Will Weak Datacenter Market Hit NVIDIA's (NVDA) Q1 Earnings?

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NVIDIA (NVDA - Free Report) is witnessing sluggish growth in the datacenter market, which might possibly persist as an overhang in first-quarter fiscal 2020 as well, results of which are scheduled to be reported on May 16.

The chip-making giant is well known for its high-performance GPUs, which are mostly lapped up by datacenter operators. However, a temporary pause in cloud spending is weighing on the upcoming quarterly results.

Click here to know how the company’s overall Q1 performance is likely to be.

Declining Datacenter Market — A Key Concern

NVIDIA’s fate is highly tied to its datacenter segment, which accounts for a bulk of its revenues. Notably, it is one of the leading players in selling GPUs to data-center service providers, boasting clients like Amazon (AMZN - Free Report) , Microsoft and Alphabet.

However, in the last reported quarter, Datacenter revenues were although up 12% on a year-over-year basis, the metric was yet much lower than back-to-back growth of more than 50% in the previous three quarters. Further, the same declined 14% sequentially. Lower Hyperscale and cloud purchases dampened results.

On the last earnings call, management stated that given the cautious spending environment due to economic uncertainties, a recovery in the datacenter segment is not expected until later this year. This makes us apprehensive about the financial performance of the fiscal first quarter.

Further, commentary on the datacenter market by NVIDIA’s peers like Intel (INTC - Free Report) and Advanced Micro Devices (AMD - Free Report) makes us wary of the impending results. Revenues of Intel’s Data Center Group fell 6.3% year over year on softness in demand in the Chinese market during the last reported quarter. On the flip side, AMD’s Datacenter CPU and GPU sales, representing mid-teens percentage of its quarterly revenues, was down as expected in the first quarter.

Nonetheless, NVIDIA’s focus on new growth boosters for its data center business, such as inference, data science and machine learning techniques are a positive. Further, the company is making a lot of progress in inference, witnessing a great adoption of T4 GPUs.

Moreover, in order to fortify its datacenter footprint and competitive edge, the company announced acquisition of Mellanox in March, which is likely to be completed by this year-end.

NVIDIA currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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