Nvidia Impresses Analysts With Datacenter Resurgence, Expanding Margins

NVIDIA Corporation NVDA reported mixed quarterly numbers, with the third-quarter results exceeding expectations, while the fourth-quarter revenue guidance was light.

The Analysts

Bank of America analyst Vivek Arya reiterated a Buy rating on Nvidia and raised the price target from $250 to $275. (See his track record here )

KeyBanc Capital Markets analyst Weston Twigg maintained a Sector Weight rating. (See his track record here)

UBS Securities analyst Timothy Arcuri maintained a Buy rating and $240 price target. (See his track record here)

Mizuho Securities analyst Vijay Rakesh maintained a Buy rating and increased the price target from $185 to $230. (See his track record here )

Benchmark analyst Reuben Roy reiterated a Buy rating and raised the price target from $210 to $240. (See his track record here)

Raymond James analyst Chris Caso reiterated a Buy rating and lifted the price target from $180 to $240. (See his track record here)

Wedbush analyst Matt Bryson reiterated an Outperform rating and a $243 price target. (See his track record here)

Nvidia Uniquely Positioned to Reaccelerate and Expand

Nvidia is uniquely positioned to reaccelerate in existing markets, while also expanding into new markets such as edge computing and 5G, Arya said in a note. The analyst qualified the third-quarter results as solid, with sales exceeding estimates by 4% and pro forma EPS 14% ahead.

The slightly light fourth-quarter sales guidance of $2.95 billion is likely due to gaming seasonality.

The analyst was left impressed with the reacceleration in datacenter sales and the continued expansion in gross margin. As such, BofA raised its fiscal years 2020 and 2021 pro forma EPS estimates by 4% and 1%, respectively. Nvidia is the firm's top large-cap pick.

Compelling Growth Opportunities Vs. Rich Valuation

The above-consensus results were driven by the stronger seasonal period for gaming, high demand for lower-priced SUPER cards and the launch of new gaming laptops, Twigg said.

Datacenter rebounded sequentially, thanks to hyperscale, although sales at the segment slightly missed KeyBanc's estimate.

The sequential revenue decline implied by the fiscal fourth-quarter guidance was due to softer seasonal demand for gaming notebooks and NINTENDO LTD/ADR NTDOY Switch consoles.

Twigg believes Nvidia has very compelling datacenter growth opportunities. As such, KeyBanc reduced its fourth quarter and fiscal year 2021 revenue estimates moderately but lifted the 2021 EPS estimate on the back of higher gross margin assumptions.

"While NVDA has compelling growth opportunities, it remains richly valued (32x our CY20 EPS estimate) compared to peers and intense competition makes winners in the emerging edge and inference markets unclear," Twigg wrote in a note.

Nothing in the numbers really sway the debate either way, Arcuri said. The analyst expects the datacenter story to get only better as the 7nm data center Ampere chip remains on track for silicon in December and volume ramps shortly thereafter.

"This should help catalyze performance-focused customers like Alphabet Inc GOOGL GOOG to come back in a more significant way," the analyst wrote.

Nividia Well Positioned For Fiscal Year 2021

The top-line beat in the quarter was driven by gaming/datacenter strength form ray tracing RTX GPUs and hyperscale/Cloud customers, Rakesh said.

Looking ahead, the company suggested weak PCs and gaming will likely be offset by continued datacenter growth and strong gross margin driven by product mix.

"NVDA's strong position in gaming, DC growth, low inventories, and good GM positions it well for F21E(Jan)," Rakesh wrote.

Datacenter Segment To Recover Strongly In 2020

Nvidia is uniquely positioned to grow at a faster CAGR relative to its semiconductor peers, thanks to its industry leading graphics processor unit technology and the increasing use of GPUs across a diverse set of growth markets, Roy said. "We expect the data center segment to recover strongly in 2020," the analyst added.

Benchmark views Nvidia shares positively following its third-quarter results.

The firm said it will revisit its estimates after Nvidia closes its pending acquisition of Mellanox Technologies, Ltd. MLNX, which is likely to occur in early 2020.

Nvidia Has $8-$10 Earnings Power

Incremental strength appears to be secular, coming in from AI inferencing, driven by speech recognition, Caso said. This provides a solid base for the expected improvement in AI training demand, driven by the anticipated 7nm product cycle, coupled with improving hyperscale budgets.

"Although the stock has now risen off the bottom, we see the potential for $8-10 earnings power as demand recovers and secular drivers take hold, leaving room for shares to move higher," Caso wrote.

Nvidia's strong datacenter revenues as well as management's robust guidance on the segment support's Wedbush's optimism around this segment, according to Bryson.

The analyst said accelerated forward growth rates for Nvidia's datacentre GPUs remain a primary pillar of his bull thesis.