UBS Turns Bullish On Nvidia After Guidance Cut, Sees Buying Opportunity

NVIDIA Corporation NVDA shares sold off Monday in reaction to a guidance cut by the chipmaker.

The pullback is a buying opportunity, according to UBS.

The Analyst

Analyst Timothy Arcuri upgraded Nvidia from Neutral to Buy and lowered the price target from $190 to $180.

The Thesis

The 20-percent Q4 revenue miss Nvidia guided to — and the consequent 15-percent pullback in the stock — set the stage for a "new positive revision cycle" starting this summer, Arcuri said in the Tuesday upgrade note.

Nvidia is undershipping demand with respect to gaming, the analyst said.

The data center issues have more to do with timing, Arcuri said, adding that there is "no alternative" in training and AI workload growth is not macro-dependent; and accelerated server penetration remains at 2-3 percent.

Inference, where competition is more relevant, accounts for only 5 percent of Nvidia's data center segment revenues, he said.

UBS estimates 2020 GAAP EPS of more than $7 and sees the likelihood of the Street undermodeling the next four to six quarters. Arcuri attributes his more positive stance on Nvidia to the fact that the gross margin is now artificially lower, and operating expenditures could be reined in to drive EPS growth even in the face of a 25-percent year-over-year decline in revenue.

The analyst estimates Q4 gaming revenue of less than $1 billion, adding that Nvidia likely undershipped demand by 40 percent. RTX demand, which is keyed to content, has been weak, but will come up later this year, he said.

"In DC, it may be undershipping demand by $150-200 million and should get this back given workload growth," Arcuri said.

UBS trimmed its 2019, 2020 and 2021 revenue and non-GAAP EPS estimates for Nvidia.