Technology

Why Nvidia Must Deliver Solid Earnings and Strong Guidance

Jon C. Ogg

Published: February 12, 2020 10:30 am

Last Updated: February 12, 2020 10:56 am

Nvidia Corp. (NASDAQ: NVDA) is set to release its most recent quarterly results after the close on Thursday, and expectations have been rising. The stock recently hit highs not seen in over a year, and the analyst community has been raising its target prices and setting longer-term expectations beyond 2021.

The Refinitiv consensus forecast calls for $1.67 in earnings per share (EPS) and $2.97 billion in revenue for the fiscal fourth quarter, but those targets have gradually ratcheted higher since the start of 2020.

Nvidia’s prior guidance had been for the company to post revenue of $2.95 billion (plus or minus 2%) with forecast “strong sequential growth” in its data center business offset by seasonal declines in its notebook GPUs and its system-on-a-chip (SOC) modules. The company also already had offered guidance for its adjusted gross margins to come in at 64.5%, and adjusted operating expenses are expected to ring in at $805 million. Nvidia also has indicated that it will return to buying back its shares after it closes the $6.9 billion acquisition of Mellanox Technologies Ltd. (NASDAQ: MLNX).

As for guidance, the consensus estimate for the current quarter is $1.52 EPS and $2.85 billion in revenues, and for fiscal 2020 the consensus is $5.58 EPS and almost $10.8 billion in revenues. For 2021, those estimates jump up to $7.26 EPS and $12.84 billion in revenues.

With shares close to $270, that gives Nvidia a blended forward P/E ratio of about 41 times expected earnings. There has been a significant multiple expansion that has been seen over the past 90 days or so, as its shares were already richly valued at about 30 times expected earnings around its last earnings report. Investors should also keep in mind that Nvidia had somewhat of a disappointing earnings report back in November, and that really wasn’t all that long ago.

As with all technology companies doing business in China and relying on manufacturing in China and Southeast Asia, investors are likely to be focused on whatever commentary and views to the supply chain around the Wuhan coronavirus. There does seem to be potential risk around Nvidia’s current quarter and the following quarter due to a coronavirus impact on the supply chain and demand markets. That could affect PCs and gaming, as well as servers and automotive-related demand. That said, a switch to indoor activities such as gaming and streaming could actually help companies like Nvidia, as long as their supply chain is holding up.

Susquehanna recently reiterated its Positive rating and raised its target price to $310 from $285, and RBC Capital Markets reiterated its Outperform rating and raised its target price to $301 from $251. Jefferies also jumped on the Nvidia train by reiterating its Buy rating and raising the target price to $315 from $255.

Nvidia was among the tech leaders in January scoring the most analyst upgrades and target hikes ahead of earnings. The stock was also among the large-cap winners with gains of 1,000% to 4,000% over the past decade.

Just on Wednesday, Wedbush Securities reiterated its Outperform rating and raised its target to $295 from $243 as it incorporates 2022 estimates into the mix. That call also took the pending Mellanox merger into account. The Wedbush call said:

While we are keeping our multiple at 29X, we are incorporating our FY’22 earnings estimates into our valuation metrics, consistent with our valuation methods for NVDA’s peers…We believe upside in NVDA’s data center sales is probable in light of recent stronger hyperscale buying trends. Moreover, should NVDA close its proposed MLNX deal, our numbers for FY’20 and FY’21 could increase considerably with MLNX’s strong performance over the past year having made the deal appear increasingly favorable for NVDA.

SunTrust Robinson Humphrey has a Buy rating on the stock, and the firm recently pointed out implications from the coronavirus:

While we expect near-term news flow to increase volatility in the sector, we anticipate the medium- and long-term fundamentals to be largely uninfluenced by this health event.

Late last week, Nvidia shares were below $252, and they hit a recent high of $272.50. The consensus price target has risen from $236.32 on the last day of 2019 all the way up to $255.78 on last look. That consensus target price was just $248.35 a week earlier.

With valuations back to being sky-high, investors should keep in mind that Nvidia’s shares have doubled from their 52-week lows. The stock also entered Wednesday with a gain of almost 14% so far just in 2020 alone, and that is up almost 30% just over the past quarter.