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Earnings preview: As supply shortages constrain hot gaming sales, server chips could determine beat or miss for chip maker

Nvidia Corp.'s fortunes for its upcoming earnings report appear to rest on data-center growth, as long-term supply shortages constrain gaming sales more severely.

Nvidia $(NVDA)$ is scheduled to report fiscal first-quarter results on Wednesday after the closing bell, and the Santa Clara, Calif.-based chip maker is looking to continue a record-breaking streak of results as the COVID-19 pandemic created more digital avenues of work and connection.

Those records are not limited to results, but share price too. So much so that the company recently announced its first stock split in 14 years after massive gains . Nvidia shares closed at a record high of $645.49 on April 15, and have gained 73% in the past 12 months.

With global chip-supply shortages a given over at least the next few quarters, analysts are keen on finding where growth areas exist at semiconductor companies. Morgan Stanley analyst Joseph Moore, who has an in-line rating, said expectations are very high and that Nvidia's data-center sales will be front and center.

"Revenue in gaming is completely supply constrained, with channel inventory remaining very lean," Moore said. "We would assume there is upside in the data-center business given Nvidia's strong growth drivers and the recovery in the enterprise/cloud; the magnitude of that upside will be key."

The reason data-center sales are more of a variable is that the lead times between orders and deliveries are much longer .

What to expect

Earnings: Of the 33 analysts surveyed by FactSet, Nvidia on average is expected to post adjusted earnings of $3.29 a share, up from $2.49 a share expected at the beginning of the quarter and $1.80 a share reported a year ago. On Estimize, which crowdsources projections from hedge funds, academics and others, the average estimate calls for $2.69 a share

Revenue: Wall Street expects revenue of $5.4 billion from Nvidia, according to 32 analysts polled by FactSet. That's up from the $4.45 billion forecast at the beginning of the quarter, and the $3.08 billion Nvidia reported in the year-ago quarter. The average Estimize estimate is for $5.5 billion. In April, Nvidia upped its forecast .

Stock movement: During the quarter, which started on Feb. 1 and ended May 1, Nvidia shares rose 16%, while the PHLX Semiconductor Index gained 8% over that period. Similarly, the S&P 500 index rose 13%, while the Nasdaq Composite Index rose 7%.

What analysts are saying

Evercore ISI analyst C.J. Muse, who has an outperform rating, feels Nvidia is primed for another analyst consensus beat and outlook raise on high demand for its products.

"The major questions for investors are whether data-center revenues can reaccelerate higher and/or is gaming currently over-earning because of crypto-led demand," Muse said.

That crypto demand has been so significant that Nvidia recently announced it is making its new gaming cards less attractive to cryptocurrency miners by hampering the features used for mining.

On the other hand, Oppenheimer analyst Rick Schafer, who has an outperform rating and a $700 price target, expects gaming to be the star of the report.

"We see broad upside (vs. original $5.3B outlook) led by gaming," Schafer said. "We see upside again limited by supply tightness."

As for the data center, Shafer said: "We look for DC spend to accelerate into 2Q as hyperscalers move past capacity digestion."

BofA Securities analyst Vivek Arya, who has a buy rating, said his $700 price target was based on "Nvidia's superior long-term growth profile in large, underpenetrated markets."

But that growth profile could be upset by the company's exposure to the PC market, competition in the data-center arena from Intel Corp. $(INTC)$ and programmable logic-device companies, along with competition in the auto-chip market from microcontroller manufacturers.

Of the 39 analysts who cover Nvidia, 33 have buy ratings, four have hold ratings, and two have sell ratings, with an average price target of $663.88, according to FactSet.