NVIDIA (NVDA) is back with a vengeance on all those analysts and investors who wrote off the gaming chip and crypto mining juggernaut.
As if recent upward estimate revisions and a 21% rally from October 1 through last week weren't enough, on Monday Morgan Stanley upgraded shares to Overweight from Equal Weight, as the bank sees the stock deserving to move even higher in 2020.
Analyst Joseph Moore raised his price target on NVDA from $217 to $259, citing a revival in both Gaming and Data Center segment performance after strong investments made in 2019.
Moore described his team's recent Cloud research that indicates the inflection in "conversational AI" is real and that new NVIDIA products in the data center arena are expected to fortify the elite chip-maker's competitive advantage.
Return to Growth
NVIDIA reported their Q3 FY 2020 (ended Oct 31) on November 14 and delivered top and bottom line beats of ~5% and 13%, respectively. Revenues of $3.01 billion declined 5.2% year over year but rose 16.9% sequentially.
Gross profit margin of 64% was 180 basis points above consensus while operating margin of 38.4% was 210bps above consensus.
My favorite semiconductor analyst, William Stein of SunTrust, commented in a November 15 research note that NVDA's improving Data Center outlook in Q4 only "hints" at what's to come in 2020...
"Management's commentary aligns with our proprietary industry contacts that reflect a significant re-acceleration in datacenter next year."
Stein maintains his long-term positive view on NVIDIA fundamentals, including its superior positioning in gaming, server acceleration/AI, and eventually autonomous driving opportunities. He believes that NVDA still deserves a structural growth multiple of 30X EPS, and this valuation is still a 10-point discount to its high-growth peers.
With next year's consensus EPS rising to $7.21, not including the Mellanox (acquisition), Stein raised his price target to $240 from $216.
Revenues at the GPU Business fell 7.1% year over year to $2.57 billion. However, on a sequential basis, segment revenues grew 21.9%.
Tegra Processor Business revenues were $449 million, up 10.3% on a year-over-year basis but down 5.5% sequentially.
On the basis of market platform, Gaming revenues were down 6% on a year-over-year basis to $1.66 billion due to decreased shipments of GeForce desktop GPUs. However, the same was up 26.4% sequentially, backed by strong growth in GeForce desktop and notebook GPUs.
Meanwhile, revenues from Data Center deteriorated 8.3% year over year to $726 million. The decline reflects lower enterprise revenues due to an unfavorable product mix and decreased DGX sales. This was partially offset by an increase in Hyperscale demand, which sequentially drove revenues by 10.8%.
Record Revenues on the Horizon
Before this report, it looked as though FY20 NVIDIA sales and profits would both see double-digit declines. With management guidance for Q4 (ends January) of $2.95 billion on the top line -- for 34% yoy growth -- the company is expected to hit just over $10.75 billion for the year, representing just an 8% drop.
And based on analyst optimism about NVIDIA's core markets, FY21 estimates are now eyeing record revenues of $12.86B for 19.4% growth.
The bottom line rise from $5.56, a 16% decline, to over $7 would represent a nearly 30% EPS advance.
The king of AI has indeed returned to strong growth. And the stock price has been racing ahead for all those chasing who missed their chance near $150.
So shares are back to trading over 10X next year's sales. This may not be the best spot to initiate new longs, but pullbacks to $200-210 will be bought aggressively by technology investors.
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