Why This Nvidia Analyst Expects Strong Q3 Earnings, Outlook

Graphics chip titan Nvidia Corporation NVDA is expected to ring in a blowout quarter when it reports third-quarter results Wednesday, according to an analyst at Raymond James.

The Nvidia Analyst: Chris Caso rates Nvidia shares a Strong Buy and $225 price target.

The Nvidia Thesis: With underlying demand trends remaining strong, a strong quarter and outlook is expected out of Nvidia, analyst Caso said in a note.

The limiting factor in the near term will likely be supply constraints, the analyst said.

The majority of sequential growth is likely to be driven by Nvidia's Datacenter segment, the analyst said. The analyst estimates Datacenter revenues of $2.82 billion, up 19% quarter-over-quarter.

The Gaming segment is likely to show muted growth due to the ongoing supply constraints, with revenues expected to increase 3% quarter-over-quarter, Caso said. The Automotive and Pro Visualization segments will likely see modest growth, he said. 

Related Link: Why This Nvidia Analyst Is Upping The Price Target Ahead Of Q3 Results

Strong hyperscale capex growth will be a tailwind into next year, the analyst said. In cloud, Nvidia will be a beneficiary of rapidly expanding growth in hyperscale datacenter capex, with hyperscalers increasingly focused on AI and machine learning, Caso said.

The stock has moved higher over the past two weeks in response to increases in total hyperscale capex for 2022, and for Facebook, Inc. FB in particular, the analyst noted.

"We think the stock reaction was justified, since a very large portion of Facebook's incremental capacity (about $5-9 billion) appears to be targeted for AI, for which Nvidia is likely to be the largest beneficiary," Caso said.

For the fourth quarter, RayJay forecasts a 9.5% sequential drop in Gaming revenues, driven by a decline in notebook and Switch, but flat desktop demand. Datacenter and Automotive revenues will likely increase 2% and 3% sequentially, while Pro Visualization and OEM could remain flat, the firm added.

NVDA Price Target: Nvidia shares were down 1.2% at $300.25 at the close Monday. 

Related Link: Why This Analyst Sees 15% Upside Potential For Nvidia Shares