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DC Strength Could Power Gains for Nvidia (NVDA) Stock, Says Analyst

Which mega-cap has benefited the most from COVID-19? Amazon? Netflix? Nope. Nvidia (NVDA) is the answer. Shares are up 50% since the turn of the year as the GPU leader has surfed the waves of a global crisis that has inadvertently played to its core strengths. 

Ahead of Nvidia’s first quarter earnings report on Thursday, Susquehanna analyst Christopher Rolland points out the key areas to focus on. Naturally, these are Nvidia’s two main revenue segments - Datacenter and Gaming. 

Based on Intel's DCG and strong results from Mellanox, which was recently acquired by NVDA, Rolland anticipates a strong showing from its Datacenter segment. The analyst’s contacts in Asia have suggested that heading into the quarter’s final stretch, enterprise demand remained healthy and most supply issues were resolved by the end of March 

As far as Gaming goes, Rolland says “data points were mixed,” as a result of a small market share loss to rival AMD in aftermarket GPUs and the impact of lower average selling prices, although GPU attach rates should act as a counter to these “modest declines.” 

COVID-related supply constraints also played a part in February, “adding a wild card to the print,” although these issues, like in Datacenter, were worked out by March. 

Looking ahead, Q1’s long awaited closing of the Mellanox deal should play its part as the year progresses. Rolland anticipates the new addition “should contribute ~$400 million of revenue and a 50-plus bps tailwind to GMs to NVIDIA’s C2Q20 guidance.” This should set the stage for overall July revenue guidance of $3.6 billion. 

In conclusion, the 5-star analyst said, “We expect NVIDIA to fare better than most this earnings season. Slower consumer demand from China could weigh, but strong DC results are likely to overcome… Overall, we expect generally in-line (to slightly better) results and guidance as stronger demand for DC likely offsets any weakness in consumer (potentially hindered by early supply chain constraints).” 

Rolland keeps his Positive (i.e. Buy) rating as is and gives the price target a $55 bump, with the new target landing at $410. Investors stand to pocket a 14% gain, should the target be met over the next year. (To watch Rolland’s track record, click here

The rest of the Street isn’t betting against Nvidia, either. 3 Holds and a Sell are trounced by 17 Buys. A Strong Buy consensus rating comes with a $327.18 average price target. Although the figure implies shares could decline by 7%, it is likely analysts will retune Nvidia models shortly. (See Nvidia stock analysis on TipRanks

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