8 Oct

Why NVIDIA Has Become an Analyst Favorite

WRITTEN BY Sneha Nahata

Chip maker NVIDIA (NVDA) is gaining analysts’ attention lately. Analysts and investors are showing optimism toward the stock, as they believe the downturn is nearing an end. NVIDIA stock has been on the rise since June despite trade war fears and the crypto bubble burst. The stock saw further upside after the company posted upbeat second-quarter earnings results in August.

Recently, institutional investors also increased their stakes in NVIDIA, as the company is expanding in gaming as well as other growth areas. Let’s see what analysts think about NVIDIA stock.

Analysts’ recommendations

Among the 39 analysts covering NVIDIA, 27 have “buy” ratings—unchanged from last month. About nine analysts have “hold” ratings on the stock—down from 11 last month. Three analysts have given the stock “sell” ratings—up from two last month. Currently, analysts have a 12-month target price of $191.43 on NVIDIA, which marks a 3.9% premium to its current price. NVIDIA’s median target price was $190.00 on October 7.

Yesterday, RBC Capital analyst Mitch Steves raised his price target on the stock to $217 and maintained an “outperform” rating. The analyst believes that demand in the company’s key Gaming and Data Center segments is improving. Moreover, the Data Center segment should benefit from some product announcements in the fourth quarter. Evercore ISI analyst C. J. Muse also remains bullish on NVIDIA’s Gaming segment and has thus increased the stock’s price target to $225.

Last month, SunTrust Robinson Humphrey analyst William Stein also upgraded the stock’s price target to $216. Stein expects positive demand trends in the stock and forecasts higher profitability ahead. Goldman Sachs analyst Toshiya Hari also had a bullish stance on the stock.

What’s driving NVIDIA stock?

We believe a turnaround in chip demand is expected in the near term, which is boosting the stock of the graphics chip giant. NVIDIA has been facing a cyclical decline in chip demand. The shrinkage of chip demand was mainly the result of the crypto bubble burst in October last year. Depleting cryptocurrency demand significantly affected NVIDIA’s Gaming segment as well as its revenue. The chip maker’s revenue fell YoY (year-over-year) for three consecutive quarters after it posted 13 straight quarters of double-digit revenue growth.

Though its revenue fell 17% YoY in the second quarter, the chip maker started showing strength sequentially. Its revenue began gaining momentum driven by growing demand for laptop GPUs and game console processors. Autonomous vehicle development agreements, as well as NVIDIA Super RTX GPUs, also helped its revenue growth. In the third quarter, the company expects a revenue improvement of 12% sequentially, but it expects its third-quarter revenue to fall 8.8% YoY.

In the third quarter, analysts expect NVIDIA’s revenue to fall 8.3%. They also expect NVIDIA’s revenue to fall 8.01% in fiscal 2020 (which ends in January 2020) compared to its 20.6% growth in the previous year. The company’s sales are likely to improve significantly by around 20.0% in fiscal 2021.

NVIDIA’s Gaming segment

The company’s Gaming segment, which accounts for more than half of its total revenue, has been improving lately. The segment’s revenue, which previously fell YoY for three straight quarters, rose 25% sequentially in the second quarter.

We believe the company’s Gaming segment is benefiting from its ray tracing technology. NVIDIA’s ray tracing technology provides a more realistic gaming experience with improved lighting, shadows, and color effects. NVIDIA’s partnership with Microsoft (MSFT) could also help its RTX ray tracing technology to expand via Microsoft’s video games.

The launch of the company’s GeForce RTX Super graphics cards should further boost its gaming revenue. NVIDIA is also offering its cloud gaming service, GeForce NOW, to Android users across PC, Mac, and SHIELD TV. The company is on track to introduce new products despite stiff competition from Advanced Micro Devices (AMD) in the gaming segment.

Yesterday, AMD launched its Radeon RX 5600 series of video cards and created a stir in the gaming market. Now, NVIDIA might launch its GTX 1660 Super and GTX 1650 Ti chips on October 29. AMD expects to launch two new graphics cards, the Navi 21 and Navi 23, dubbed the “NVIDIA killers,” in 2020.

Data center revenue

NVIDIA is also focusing on its Data Center segment, which generally has high margins. Of late, data center revenues are slowing, as hyperscale customers are absorbing excess purchases made earlier in 2018 amid US-China trade war fears. Meanwhile, NVIDIA is seeing increased demand from customers adopting GPUs in the data center and automotive spaces. Analysts are also betting on its Data Center segment to drive its growth.

NVIDIA stock is rising

NVIDIA stock closed 1.3% higher and stood at $184.33 on October 7. At this closing price, NVIDIA’s market cap stands at around $112.3 billion. The stock is trading 31.4% lower than its 52-week high of $268.76 and 48.1% higher than its 52-week low of $124.46. The stock has risen 38.4% this year.

We expect the company’s focus on its Gaming and Data Center segments to help it gain revenue in the near term. The expectation of a trade deal between the US and China could further boost NVIDIA stock.

Latest articles

Is the technology sector due for a correction? Twitter (TWTR) and Intel Corporation (INTC) will release their Q3 2019 stock earnings on October 24.

The Dow Jones Industrial Index (or DJIA) is trading just 2.2% below its all-time high. But is the stock bubble about to burst?

Renaissance Technologies had a strong investment in the healthcare sector in Q2 2019. The healthcare sector makes up 18.16% of the firm's total portfolio.

This week, semiconductor equipment suppliers Teradyne Inc. (TER) and Lam Research (LRCX) will report their quarterly earnings.

Major chip companies Texas Instruments (TXN) and Xilinx (XLNX) released their earnings last week and saw their stocks fall.

On October 18, CNBC reported Bill Gross top picks. His top stock picks were Annaly Capital (NLY), Invesco (IVZ) and Allergan (AGN).