Analyst Not Budging On Bearish Nvidia Thesis

Michael McConnell of Pacific Crest is sticking with his bearish rating on NVIDIA Corporation NVDA's stock despite a beat-and-raise earnings report and a 15 percent surge Wednesday.

McConnell maintained an Underweight rating on Nvidia's stock with a price target boosted from $90 to $99 as the company's report contained some concerning signs.

First, the analyst highlighted a strong beat in datacenter sales as strong Tesla GPU sales did offset weak gaming sales. Also, the analyst found it surprising how the company believes its Gaming segment could grow in the coming quarter.

No Margin Upside

Moreover, the datacenter's gross margins of 59.4 percent was only in-line with the analyst's expectations and declined 60 basis points from the prior quarter. The decline in margins was attributed to lower royalties from Intel and product margins in the Nintendo Switch.

McConnell noted that the company's earnings per share of $0.79 was boosted by a lower tax rate of 5.4 percent versus 17 percent, which the company previously guided to. Excluding the tax benefit, the analyst calculated that its earnings per share would have been $0.69.

Finally, the analyst argued that without signs of gross-margin upside, there is no reason to hold a bullish stance and justify a premium valuation.

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