When you're one of the stock market's highest-flying names, good earnings aren't always good enough to appease investors. You have to be perfect. Nvidia ( NVDA) is finding this out the hard way.
Heading into last night's second earnings report, Nvidia's share price had almost tripled over the previous year, and traded at an eye-popping 46 times 2018 earnings estimates. The chip maker delivered sound financial results, with per-share earnings and revenue both beating expectations.
Yet Nvidia's datacenter segment, which serves artificial intelligence and machine learning applications, posted lackluster growth. Also giving investors pause, was guidance for third quarter operating expenses and concerns about revenue upside from cryptocurrency mining.
Now at $155.14 a share, Nvidia's stock has fallen 5.8% in recent market action.
"It was a good quarter, but not perfect," says Susquehanna Financial Group's Christopher Rolland. "It needed to be perfect."
But perfect or not, analysts are now at odds over Nvidia's prospects going forward, debating whether today's selloff is a buying opportunity or the start of a long, brutal downward slide.
Instinet analyst Romit Shah says Nvidia is overvalued. Looking ahead, he predicts subdued trends in the PC gaming business, minimal gross margin leverage and slowing revenue and EPS growth.
We continue to believe investors must see a path to low 60% GM in order to justify $5+ EPS by 2020. Gross margin, however, only exceeded guidance by 20bps, as management highlighted the Volta ramp as a slight margin headwind. Guidance suggested that operating expenses are accelerating - partially due to Volta, partially seasonal - albeit on higher revenue. We expect that the mix of Nintendo Switch versus core gaming GPU's weighed on margins as well.
We are raising October period EPS from $0.86 to $1.06 and raising F19 EPS from $3.61 to $3.82 and F20 EPS from $4.00 to $4.28. We maintain our Reduce rating, but raise our target from $90 to $110 or 25x F20 proforma EPS.
Wells Fargo's David Wong reiterated an Underperform rating and warned that Nvidia's could drop another 50% in the next year to $75 a share.
While the ongoing strength in gaming might be evidence of good secular growth potential of this segment, we continue to be concerned about competitive risk for Nvidia from AMD, and the possibility that the outsized growth seen in recent quarters in the overall gaming GPU market might not last. OEM sales grew 54% year/year primarily due to a jump in the demand for GPUs in cryptocurrency mining.
... Our FY18 EPS estimate increases to $3.54 from $3.12 and our FY19 EPS estimate increases to $3.45 from $3.34. We are maintaining our Underperform rating on Nvidia and our price target of $75, based on approximately 22x our FY19 EPS estimate.
Rosenblatt Securities analyst Hans Mosesmann lifted his price target from $152 to $180, arguing that a high 30s price-to-earnings multiple "is justified for valuing Nvidia, given "the secular growth prospects in green field and disruptive areas of artificial intelligence and autonomous driving."
At Loop Capital Markets, Betsy Van Hess raised her price target from $137 a share to $181 a share.
We think investors' concerns that data center growth has slowed and topped out are unwarranted as FQ2 was a transition quarter to Volta. With Volta ramped, we are modeling a return to double-digit growth in FQ3. We are also cautious on how much more legs the demand from crypto currency mining has and we are modeling that business to flatten out in FQ3 and decline -20% YoY in F2019. We expect strong demand in data center and gaming in F2019 to more than offset the declines of crypto and we are modeling 14% YoY and 25% YoY growth, respectively. As for the step-up in OpEx, we believe NVDA must continue to spend to maintain its leadership position. We believe there is leverage in the model in F2019 driven by revenue growth and expanding margins.