Nvidia Still Enjoying Record Revenue; FVE Up to $515

Nvidia NVDA reported impressive first-quarter results with revenue ahead of management’s guidance. The firm had record 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 Ethereum), as we view this application as a volatile one that could lead to lower GPU sales if crypto prices trend down. Nvidia was negatively impacted by lower cryptocurrency prices in late 2018 that resulted in gaming GPU sales falling 12% in 2019 (fiscal 2020). We estimate crypto mining-related demand contributed around $400 million to $500 million in GPU sales during the quarter.

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 probability-weighted fair value to $515 per share from $400. We are raising our standalone fair value estimate for Nvidia to $465 per share from $352, as we incorporate the stronger results and outlook for the second quarter. Nvidia is in the process of acquiring ARM, and if the deal closes, our fair value would increase to $565 per share. Our probability-weighted fair value estimate assigns 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 $465 fair value estimate, we like that Nvidia is using its rich shares to fund a large portion of the deal.

First-quarter sales grew 84% year over year to $5.7 billion, with gaming and data center revenue up 106% and 79%, respectively. Data center sales benefitted from the inclusion of Mellanox and continued adoption of Nvidia’s A100 GPUs. We estimate data center sales were up about 30% year over year on an organic basis (excluding Mellanox).

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