BofA: Nvidia Is The Beneficiary Of A Supercomputing 'Arms Race'

NVIDIA Corporation NVDA stands to gain from the strength in gaming and the large upgrade potential from a 200-million-plus gamer base, according to Bank of America Merrill Lynch.

The Analyst

BofA Merrill Lynch analyst Vivek Arya reiterated his Buy rating on his top pick Nvidia and increased his price target from $251 to $275.

The Thesis

Nvidia is a key beneficiary of the global "arms race" for supercomputing that's seen as critical by regional superpowers such as the European Union and China, Arya said in a Thursday note. (See the analyst's track record here.)

Nvidia's Volta-based Tesla cards, with an average selling price of $5,000 to $6,000, and DGX workstations, priced at $149,000, are the key building blocks for supercomputing, the analyst said.

Arya said his monthly check on gamer preferences and pricing indicated steadily increasing penetration of Nvidia's current-gen Pascal cards. The mix shift to Pascal is very accretive, as cards have a 10-40 percent higher ASP, Arya said.

Commercial card pricing increased 27 percent year-over-year, thanks to strong demand from crypto miners and gamers upgrading to premium SKUs, according to BofA.

If the Nintendo Co., Ltd (ADR) NTDOY Switch gains a stronger foothold in China, BofA projects an additional 24 million units or $1 billion upside for Nvidia.

When Nvidia begins rolling out its next-gen Volta cards, likely just in the premium segment during the second half of 2018, it's likely to create further upside and tailwinds for upgrades and ASP, Arya said.

BofA raised its calendar year 2018 pro forma earnings per share estimate for Nvidia by 5 percent and the calendar year 2019 estimate by 10 percent.

"While the stock trades at a premium valuation, we believe this is justified by NVDA's leadership in the largest and fastest growing markets in semis including AI, gaming, VR and autonomous cars."