Nvidia Continues to Enjoy Stellar Growth; FVE to $400

Nvidia NVDA reported impressive fourth-quarter results with revenue ahead of management’s guidance. The firm had strong showings in both gaming and data center segments, but we are concerned with the surge of demand for Nvidia’s gaming GPUs used in cryptocurrency mining (specifically Etherium), as we view this application as a volatile one that could lead to lower GPU sales if crypto prices trend down. Nvidia faced a crypto downturn before, as lower cryptocurrency prices in late 2018 resulted in gaming GPU sales falling 12% in 2019 (fiscal 2020). Management was quick to disaggregate gaming and crypto mining-related sales, citing analyst estimates of $100 million to $300 million in a fourth-quarter revenue contribution of crypto mining. We believe the true impact is higher and we think a slowdown in gaming GPUs is likely in the back half of calendar 2021.

Nonetheless, narrow-moat Nvidia continues to execute well in growing its data center business thanks to its A100 GPU for Artificial Intelligence and networking products from its 2020 Mellanox acquisition. We are raising our standalone fair value estimate for Nvidia to $352 per share from $288, as we incorporate the stronger results and outlook for the first quarter, in addition to the time value of money as we roll our model forward. Nvidia is in the process of acquiring ARM, and if the deal closes, our fair value would increase to $448 per share. Our probability-weighted fair value of $400 includes the pending acquisition of ARM, which we assign a 50% probability of closing due to potential regulatory scrutiny and ARM customer pushback. Nvidia is paying a high multiple for ARM’s earnings but given the GPU leader’s share price is trading at a significant premium to our updated standalone $352 fair value estimate, we like that Nvidia is using its rich shares to fund a large portion of the deal.

Fourth-quarter sales grew 61% year-over-year to $5 billion, with gaming and data center revenue up 67% and 97%, respectively.

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