Weakness In Nvidia's Gaming Segment Could Be A Passing Phase, JPMorgan Says In Upgrade

After contrasting earnings reports from Intel Corporation INTC and Advanced Micro Devices, Inc. AMD, JPMorgan has turned incrementally positive on NVIDIA Corporation NVDA, citing its strong growth outlook and underperformance in the recent market sell-off.

The Analyst

Analyst Harlan Sur upgraded Nvidia from Neutral to Overweight and lowered the price target from $265 to $255.

The Thesis

The 36-percent pullback in Nvidia shares since Oct. 1 versus the 17-percent drop for the Philadelphia Semiconductor Index is explained by two fears, Sur said in the Tuesday upgrade note: GPU channel inventory impacting near-term demand and the new RTX series gaming platform not seeing much of an upgrade cycle in the near term. (See the analyst's track record here.)

Notwithstanding near-term gaming GPU challenges, Sur said Nvidia has strong momentum in high-performance computing/professional visualization/data center products amid solid penetration in new compute workload acceleration.

Nvidia will continue to see outsized growth and clear leadership in data center/HPC and gaming over the next few years, the analyst said.

The imminent release of over 30 new games as well as secular growth trends in esports could cushion the weakness in gaming that stems from an inventory glut, he said.

Autonomous driving is a long-term tailwind for Nvidia, and the company is an "emerging frontrunner" in the sector, Sur said.

Nvidia's top-line and gross margin could get a shot in the arm over the next few years as high-end gaming and data center become a larger portion of the mix, according to JPMorgan.

The sell-side firm also projects further operating margin expansion.

JPMorgan lowered its near-term estimates for Nvidia to account for a more sluggish GPU environment, but forecast $10-plus in annualized earnings power in 12-18 months.