Earnings Outlook: Nvidia earnings: After big stock gains, all segments are under the microscope

Nvidia Corp. shares have continued to be the darling of the tech sector this year, nearly doubling in price over that time, as the chip maker fires on all cylinders in data center tech, gaming and cryptocurrency chipsets, and self-driving car technologies.

When Nvidia NVDA, +1.34% reports third-quarter earnings after the close of trading on Thursday, investors will get a better look under the hood. The stakes for the Santa Clara, Calif.-based graphic processing unit maker run high, following a very high-profile quarter.

In October, Nvidia unveiled a licensed-plate sized product called the Drive PX Pegasus that has the power of 100 servers in a data center to advance its push into autonomous driving vehicles. Nvidia’s also trying to eat Apple Inc.’s AAPL, +2.61% lunch by recruiting Alphabet Inc.’s GOOG, +0.67% GOOGL, +0.67% Google Assistant technology into its Shield 4K video streaming and gaming device to try to compete with Apple TV.

In September, Nvidia cut a deal with Chinese cloud-based firms like Alibaba Group Holding Ltd. BABA, -0.87% Baidu Inc. BIDU, -0.23% and Tencent Holdings Ltd. 0700, +1.71% to upgrade their data centers with its Volta-based hardware, causing a big rally in shares.

With that active quarter, Nvidia results have a high bar to clear to support its stock price, something which other chip companies have struggled with this earnings season.

Unlike Advanced Micro Devices Inc. AMD, +2.49% Nvidia has been a more open cheerleader of its hand in the cryptocurrency-mining space, where miners use graphics cards to unlock new denominations of bitcoin and Ether coins. Just recently, the price of one bitcoin BTCUSD, +0.39% reached an all-time high north of $7,300 for a 650% year-to-date advance, and is even challenging gold and silver as a store of value for investors.

Nvidia has become the target of many competitors in the field of artificial intelligence and machine learning, most notably the world’s largest chip maker, Intel Corp. INTC, -1.61% Intel said it is working with Facebook Inc. FB, +0.00% to develop Intel’s Nervana chip.

What to expect:

Earnings: Nvidia is expected to report earnings of 95 cents a share, according to the average prediction of 27 analysts surveyed by FactSet. That would be a 14% gain from the year-ago period, when Nvidia reported earnings of 83 cents a share. At the beginning of the third quarter, analysts had been estimating consensus earnings of 79 cents a share. The consensus on Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, is for adjusted earnings of $1.02 a share.

Revenue: Nvidia is forecast to report revenue of $2.36 billion, according to the average of 28 analysts surveyed by FactSet. That’s an expected 18% rise from reported revenue of $2 billion in the year ago period. At the beginning of the third quarter, analysts had been forecasting revenue of $2.13 billion. The Estimize revenue consensus is $2.42 billion.

Stock movement: Nvidia shares dropped 5% the day after the company’s August report of second-quarter earnings, which topped Wall Street views, and analysts were quick to hike price targets. Since that report, shares have rallied more than 26% to all-time highs, and are up nearly 95% year to date, compared with a 41% year-to-date rise in the PHLX Semiconductor index SOX, +1.77% and a nearly 16% rise in the S&P 500 index SPX, +0.31%

What analysts are saying

RBC Capital Markets analyst Mitch Steves, who has an outperform rating on Nvidia and recently raised his price target to $230 from $220, said investors will be refocused on an acceleration of Nvidia’s data center sales given positive indications from Amazon.com Inc. AMZN, +1.59% and Intel earnings. He notes:

With triple-digit y/y growth in the Data Center segment, we see potential for robust growth from Data Center along with VR. Importantly, we think the DGX-1 product will continue to gain traction over the next four quarters

Similarly, Mizuho analyst Vijay Rakesh, with a buy rating, hiked his price target on Nvidia to $220 from $180 in mid-October, and said Nvidia remains strong in gaming GPUs and cryptocurrency. Rakes believes that the deal with Chinese cloud firms serves as a tailwind for Volta-based data center products, with Drive PX serving as a tailwind into 2018.

Jefferies analyst Mark Lipacis, who has a buy rating on the stock, sees Nvidia’s investment in its CUDA parallel computing and programming platform as giving the company a multiyear competitive advantage over competitors, and writes that gaming will benefit from increased demand for high-end PC cards and those for cryptocurrency mining. In October, Lipacis hiked his price target on Nvidia to $230 from $180 on the belief that the company’s Volta graphics processing unit will outperform competitors in the field of neural networks applications. He notes:

Our field work indicates that NVDA’s most recent datacenter GPU solution, Volta, keeps NVDA well ahead of its competition. A key differentiator for Volta is its Tensor cores, which enable it to process matrix multiplication operations in a highly efficient manner – key for neural network training.

Of the 37 analysts that cover Nvidia, 18 have overweight or buy ratings, 14 have hold ratings, and five have sell ratings. Analysts on average have a $174.97 target price on Nvidia, according to FactSet, 16.2% lower than Friday’s closing price.

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