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Nvidia Earnings: Why Are Investors and Analysts Bullish?

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Nov. 13 2019, Updated 7:39 a.m. ET

Nvidia (NVDA) is set to report its earnings for the third quarter of fiscal 2020 after the closing bell on Thursday. We think that the company looks strong before its earnings release.

For the third quarter, Nvidia expects its revenues to be $2.90 billion (plus or minus 2%). The company expects its third-quarter revenues to fall 9% YoY. The chipmaker expects its gross margin to be 62%–63% in the third quarter. Analysts also expect Nvidia’s sales to fall 8.45% YoY to $2.9 billion in the third quarter. The earnings will likely fall 14.5% to $1.57 per share in the upcoming quarter.

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Nvidia’s key factors

We think that the company’s gaming segment will recover in the third quarter after delivering consecutive quarters of declining revenues YoY. Notably, the gaming segment contributed over 50% to the company’s total revenues in the second quarter. The gaming revenues fell 27% YoY in the second quarter due to fewer gaming desktop GPU shipments. However, the gaming segment’s revenues grew 25% sequentially in the second quarter due to the next-gen RTX ray-tracing chips.

For the third quarter, Nvidia CFO Colette Kress is betting on games adopting ray tracing technology. The company’s partnership with Microsoft (MSFT) through Minecraft video games would expand the ray tracing technology. We also think that Nvidia would benefit from the strength in Turing GPUs and advanced graphic cards. The company’s launch of its GeForce RTX SUPER graphics cards will likely boost its footprint in the high-end market. On October 29, Nvidia released GeForce GTX 1660 SUPER and GeForce 1650 SUPER for gamers. These two SUPER graphics cards, based on Turing-architecture, should boost the company’s gaming business in the rest of fiscal 2020. Nvidia thinks that its gaming chips could fuel growth in the computer graphics industry.

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During the second quarter, the company launched 25 more gaming laptops. Nvidia’s GeForce RTX graphics cards will likely drive the company’s laptop business in the third quarter. The company will unveil ten new RTX Studio laptops and professional-grade mobile workstations for gamers in the third quarter.

Besides the gaming business, Nvidia is also optimistic about its data center and automotive segment amid the rising demand for its GPUs. The company is also focusing on expanding in the AI market. Nvidia generates high margins from its data center businesses, which could help it invest in future technologies.

Headwinds in Q3

However, Nvidia could continue to struggle due to competition with rival Advanced Micro Devices (AMD) in the GPU space. AMD’s upcoming Navi processors, which have been termed as the “Nvidia killer,” might take a toll on the company’s GPUs.

The latest uncertainties revolving around the trade war, according to CNBC, are a concern for chip companies. Notably, semiconductor stocks have high exposure to China’s markets. Nvidia depends on approval from China for its pending acquisition of Mellanox Technologies (MLNX). The companies agreed to close the Mellanox acquisition by the end of this calendar year. However, the ongoing trade war has complicated the Mellanox deal.

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Why analysts love Nvidia stock 

Despite trade war fears, several analysts have an optimistic view of Nvidia stock. Last month, CNBC’s host Jim Cramer showed his optimism towards the stock. Cramer advised investors to buy the stock over Microchip Technology (MCHP). On November 5, Microchip Technology delivered in-line earnings but missed the sales estimates in the second quarter.

Just ahead of the third-quarter earnings, UBS and Deutsche Bank raised their target prices on Nvidia stock. Last week, Craig-Hallum analyst Richard Shannon increased its target price on the stock. Last month, Bank of America and RBC Capital also hiked their target prices on the stock. Evercore ISI and SunTrust Robinson Humphrey are also upbeat about the stock.

According to Deutsche Bank analyst Ross Seymore, cited in a MarketWatch report, Nvidia would see “modest upside” in its third-quarter results. Analysts at UBS, Craig-Hallum, Bank of America, and Goldman Sachs are also bullish on the company’s gaming business.

The bullish analysts have put Nvidia’s 12-month target price at $204.42—a 2.5% discount to the current price at $209.61 on Tuesday. Among the 40 analysts covering Nvidia stock, around 28 recommend a “buy,” nine recommend a “hold,” and three recommend a “sell.”

Stock valuation

Analysts expect Nvidia’s revenues to fall 7.95% in fiscal 2020 (ending January 2020) to $10.8 billion compared to 20.6% growth the previous year. The sales will likely improve significantly by around 19.8% in fiscal 2021 to $12.9 billion. Analysts also expect the adjusted EPS to fall about 18.7% in fiscal 2019. However, the earnings will likely increase 32.3% in fiscal 2021.

The stock looks expensive with an EV-to-revenue ratio of 11.24x for the upcoming fiscal year given its negative earnings and revenue growth projections.

Stock returns

On Tuesday, the stock closed 3.6%, 11.1%, and 19.0% above its 20, 50, and 100-day moving averages of $202.25, $188.61, and $176.10, respectively. Nvidia’s 14-day relative strength index score of 67.59 indicates that the stock is nearing the “overbought” side. The stock closed near its upper Bollinger Band of $214.63 on Tuesday, which indicates that the stock is overbought.

Looking at the technical levels, we think that investors have already overbought the stock at the current levels. Analysts’ upgrades before the company’s third-quarter earnings signal that the stock has upside potential.

Nvidia stock has only risen 7% from last year due to the crypto bubble burst. However, on a year-to-date basis, the stock has gained 57.4%, which signals a recovery. We expect the improved chip demand to lead to share price gains. A trade truce would also push the stock price higher.

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