Nvidia's Boosted Q2 Results Lift FVE to $250

Nvidia NVDA reported stellar second-quarter results with revenue exceeding the midpoint of management’s guidance. The firm benefited from strong showings in both gaming and data center segments, with gaming enjoying an easy year-over-year compare and the latter bolstered by the inclusion of recently acquired Mellanox as well as Nvidia’s latest A100 data center GPU. Management anticipates more muted sequential growth for the data center segment in the third quarter, but gaming sales are expected to be up over 25% sequentially (firm will be launching a new 7-nanometer gaming GPU).

We are raising our fair value estimate to $250 per share from $200, as we incorporate a stronger near-term outlook. However, we continue to view shares as overvalued as we think current levels imply narrow-moat Nvidia is the sole beneficiary of the burgeoning AI and self-driving trends.

Concerning ARM (which Nvidia is reportedly in talks to acquire from SoftBank), CEO Jen-Hsun Huang praised the architecture as the most energy efficient. The most logical rationale for a potential deal is to enable Nvidia to offer a comprehensive data center portfolio that includes ARM-based CPUs. While there is nothing stopping the firm from developing its own ARM-based server CPU (Nvidia’s Project Denver in 2014 sought to accomplish just that), we assume an outright purchase may help Nvidia accelerate any server CPU ambitions it may have. Nonetheless, SoftBank purchased ARM for $32 billion, and we surmise Nvidia could have to pay upwards of $40 billion. Regulatory risk (particularly from escalating U.S.-China tensions) and potential pushback from major ARM licensees (including Apple, Qualcomm, and Huawei) are formidable hurdles to the consummation of a deal, in our view.

Second-quarter sales grew 50% year over year to $3.9 billion. Gaming sales were up 26% year over year. Data center sales were up 167% year over year thanks to Mellanox (14% of total revenue) and the A100 launch.

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