Is the Surge in Nvidia (NVDA) Stock Sustainable? Merrill Lynch Sees Further Upside Ahead

Chip-maker Nvidia (NVDA) had a great week in the markets, gaining nearly 7% as the share price broke above $170. Even more impressive, the gains came after a 7% gain on Friday.

Finally, and probably most importantly, Nvidia’s strong earnings for fiscal Q2 easily beat the forecasts and assuaged investor fears that the company could not bounce back from its poor showing back in January. Revenues, while down 17% annualized, came in at $2.58 billion – 1.5% higher than the expected $2.54 billion. EPS results were even stronger, with the $1.24 reported beating the $1.15 forecast by 7.8%.

5-star Merrill Lynch analyst Vivek Arya saw the pop in NVDA and gave it his approval, along with a Buy rating. He points out Nvidia’s success with the gaming sector, but especially with the new RTX chips. He sees RTX a field for growth, well suited to “Nvidia’s superior long-term growth profile in large, underpenetrated markets.”

Arya also went out on a limb and maintained a bullish price target of $225. For perspective, Nvidia’s stock closed at $171.23 today, so this implies upside of more than 30%.

“Overall NVDA’s gaming business is well set to recover from last year’s crypto-driven headwinds, as gamers upgrade to RTX Turing cards with ray-tracing that start at a $349 ASP (average selling price) with variations to $1,199) or 40% above vs. prior-gen $249+ Pascal card,” Arya opined.

Stepping back, some recent events come into focus, lending more clarity to the semiconductor company’s gains.

Working with Microsoft on Minecraft

A lot of good things can happen at conventions, and on Monday Nvidia and Microsoft together announced at the Cologne, Germany Gamescon that the chip company’s RTX technology will be added to upcoming PC versions of the popular game. RTX will improve the lighting, shadows, and colors, and undoubtedly enhance the Minecraft gaming experience.

It’s good news for both companies, but especially Nvidia. Getting its best graphic chip into the world’s best-selling video game ever is an undoubted coup and bodes will for Nvidia’s near- to mid-term GPU sales.

A Reprieve on the China Front

Also good for Nvidia is the Trump Administration’s decision to hold off, at least for now, on fully banning US companies from working Huawei, the giant Chinese telecom that has been accused of manipulating 5G networks. US companies have an additional 90 days during which they can continue with Huawei or prepare to back out. Nvidia, which counts Huawei as a major customer, benefits either way.

The Consensus Verdict

Wall Street loves Nvidia, considering most voices are betting on this GPU giant. TipRanks analytics exhibit NVDA as a Buy. Based on 27 analysts polled in the last 3 months, 19 rate a Buy on Nvidia stock while 7 maintain a Hold, and only one recommends Sell. Meanwhile, the 12-month average price target stands at $184.83, marking an 8% upside from where the stock is currently trading. (See NVDA’s price targets and analyst ratings on TipRanks)

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