Nvidia's Q3 Success Dampens Fear Of Gaming Growth Slowdown

NVIDIA Corporation NVDA's third quarter earnings report consisted of a top and bottom line beat, but some analysts are now questioning the sustainability of its recent momentum, especially in the key gaming segment.

The Analyst

KeyBanc Capital Markets' Michael McConnell.

The Rating

McConnell maintains a Sector Weight rating on Nvidia's stock with no assigned price target. (See McConnell's track record here.) 

The Thesis

Nvidia's strong third-quarter beat can be attributed to strong sales of GPUs to data center and gaming customers, McConnell said in a note. But the analyst's checks with desktop graphics card manufacturers are implying "flat" sales in the fourth quarter, and any growth in gaming will be offset by declining demand from cryptocurrency miners, he said. 

Nvidia's fourth quarter guidance implies nearly flat revenue growth on a sequential basis, but 22 percent on a year-over-year basis, McConnell said. The guidance is driven by seasonal sales declines from the Nintendo Switch, expectations for a decline in cryptocurrency mining demand and expectations for growth in data center sales, according to KeyBanc. Nvidia's operating expense growth guidance of 7 percent from Q3 partially offsets the higher revenue guidance, McConnell said. 

The analyst said he sees a "fair value" for Nvidia's stock at $200 per share, or 40x 2019E EPS of $5.

Price Action

Shares of Nvidia were trading higher by more than 5 percent early Friday at $215.92, above the prior 52-week high of $212.90.

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Photo courtesy of Nvidia.