Nvidia Corp. (NVDA) has seen profits and revenue skyrocket throughout much of the past two years. As the COVID-19 pandemic shifted work and entertainment to the home, demand for the company’s products surged. But Nvidia now is facing a dramatic slowdown in growth as well as regulatory problems. The company recently agreed to pay a $5.5 million penalty to federal securities regulators based on allegations that Nvidia failed to adequately disclose revenue from cryptocurrency mining during two quarters in 2018.

Investors will be looking to see how Nvidia manages these challenges when the company reports earnings on Aug. 24, 2022 for Q2 FY 2023. Nvidia’s latest fiscal year (FY) ended Jan. 30, 2022. Analysts expect earnings per share (EPS) to decline year-over-year (YOY) for a second consecutive quarter, while revenue grows at its slowest pace in over two years.

Investors will also be focusing on Nvidia’s data center revenue, a key metric of sales generated by a rapidly-growing segment of the company’s business. Nvidia makes chips used by data centers. Demand for data center services has increased amid the pandemic, sparking a rise in demand for Nvidia’s chips. Analysts predict that the company’s data center revenue will grow significantly YOY in Q2 FY 2023, but at a slower pace than the last two quarters.

Forecasts also suggest that the company’s annual data center revenue for FY 2023 will exceed its annual gaming revenue for the first time. It should be noted that Nvidia’s acquisition of Mellanox Technologies Ltd., completed in 2020, sharply boosted Nvidia’s data center revenue.

Nvidia shares mounted a significant rally in October and November 2021, leading into the company’s Q3 FY 2022 earnings release in mid-November. The stock gradually gave up most of those gains by March 2022, then briefly spiked again later that month. From March through July of this year Nvidia shares have sharply fallen, lagging the market for the first time in many months. In the last two months the shares staged a modest advance. As of Aug. 23, Nvidia stock has provided a 1-year trailing total return of -21.3%, well behind the S&P 500’s return of -7.6%.

Nvidia Earnings History

Nvidia’s quarterly EPS performance historically has been mixed. For the company’s Q4 FY 2019 through Q3 FY 2020, Nvidia posted five consecutive quarters of YOY EPS declines. However, beginning in Q4 FY 2020, this trend sharply reversed and quarterly EPS increased YOY for nine consecutive quarters through Q4 FY 2022. During this period, EPS more than doubled YOY for four out of those nine quarters. But in the most recent two quarters, EPS has declined YOY. For Q2 FY 2023, analysts expect a 46.7% decline, the biggest quarterly drop YOY in three years.

Nvidia also saw a similar trend with revenue, which declined YOY for several quarters in FY 2019 and FY 2020. However, since then revenue has grown YOY for 10 straight quarters through Q1 FY 2023. Revenue growth peaked in Q1 FY 2022, rising 83.8%. Growth has remained robust, but it has slowed markedly over the last several quarters. For Q2 FY 2023, revenue is expected to increase 11.1%, the smallest gain in the past 11 quarters.

^{Source: Visible Alpha}

The Key Metric

As mentioned above, investors will also be focusing on Nvidia’s data center revenue. Nvidia has traditionally specialized in making chips for the gaming and graphics industry, being a pioneer in the development of graphics processing units (GPUs). It turns out that the robust computational capabilities employed by GPUs to power video games and graphics software are also well-suited for technologies like AI and machine-learning. Both of those technologies are increasingly important for the rapidly growing data center market. Demand for remote computing power increased substantially during the pandemic as more and more people began working from home and businesses were forced to shift certain operations online.

Investors will watch closely at signs that Nvidia’s big gains in data center revenue may have been tied exclusively to the pandemic, and thus may not be sustainable. Some trends suggest this may be the case: data center revenue grew at its fastest pace in Q2 and Q3 FY 2021, the height of the pandemic, and has slowed since. But a promising sign is that data center revenue has continued to grow at a faster pace than Nvidia’s core gaming business revenue, which may reflect a genuine shift in overall demand for Nvidia products. For Q2 FY 2023, Analysts predict that quarterly data center revenue will rise 64.7% YOY. That’s nearly double the pace of the same quarter a year earlier, though a slightly slower pace than the previous two quarters.