MKM Highlights Near-Term Challenges for Nvidia (NVDA)

MKM's Ruben Roy sees NVDA shares as evenly valued with current levels and keeps eyes open on prospective short-term gaming "uncertainties."

Nvidia (NASDAQ:NVDA) can add one more robust quarterly show to its track record, trouncing its own first fiscal quarter guide for 2019 as well as the Street’s expectations. That said, the short-term is not a home free stretch just yet for a chip giant that faces some “challenges” ahead, says MKM analyst Ruben Roy.

On back of raised EPS expectations, the analyst reiterates a Neutral rating on NVDA stock while bumping up the price target from $245 to $255, which essentially aligns with current levels. (To watch Roy’s track record, click here)

For the first fiscal quarter, Nvidia amassed an impressive 66% year-over-year rise to $3,207 million in revenue, and $1.98 in GAAP, far ahead of the Street’s $2,892 million and $1.46 forecasts. The stars of the quarter were Nvidia’s gaming and data segments, with gaming jumping 68% in year-over-year growth and data center leaping 71% in year-over-year growth. The NVDA team highlighted crypto-specific graphics processing units (GPU) hit $289 million and Roy believes the crypto-related standard GPU revenue rose from the fourth quarter to the first quarter.

Meanwhile, the second fiscal quarter revenue guide likewise shot above the Street’s estimates, with NVDA calling for $3,100 million in revenue against the Street’s $2,953 million. The midpoint of Nvidia’s guide suggests 39% in year-over-year gains. GAAP gross margin is anticipated to hit 63.3% at the midpoint of the guide with GAAP operating expenses anticipated to approach $810 million, a lift from the $773 million in the first quarter, marking a 23% year-over-year rise. Roy attributes this to the company’s eyes on investing “aggressively in growth markets.”

Considering the NVDA team’s guide, the analyst now takes his expectations on an upturn from $1.49 to $1.64 in GAAP EPS for the second fiscal quarter, more confident than the Street’s $1.48 forecast. For fiscal 2019, the analyst is tweaking his revenue projection up from $12,529 to $12,842 million and GAAP EPS from $6.38 to $7.05. For context, the Street is looking for $12,360 million in revenue and $6.20 in GAAP EPS. When glancing ahead to fiscal 2020, the analyst scales down his revenue expectations from $14,612 to $14,425 million but bumps up his EPS expectations from $7.37 to $7.50.

Roy concludes: “Cryptocurrency mining related revenue was, again, above management expectations. NVDA noted that crypto-based demand and related revenue are expected to decline to roughly 1/3 of the Q1 level in Q2 and with lower crypto demand GPU pricing and availability have begun to normalize. While Q2 revenue guidance, at $3,100 million, is above the current consensus estimate of $2,953 million, it is difficult to assess how medium term gaming segment performance will materialize as seasonal demand metrics remain skewed […] While we would agree that NVDA’s longer-term prospects in multiple growth markets remain bright, for now, given some of the near-term uncertainties around the gaming segment and given that NVDA’s valuation remains meaningfully higher than semiconductor peers, we maintain our Neutral rating on NVDA shares.”

TipRanks indicates positive sentiment mixed with caution circles Nvidia shares. Out of 22 analysts polled in the last 3 months, 16 are bullish on the chip giant, 5 remain sidelined, while 1 is bearish on the stock. With a return potential of 5%, the stock’s consensus target price stands at $274.11.  

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