Nvidia's Gaming and Cloud Bolster Q3; FVE Up to $340

Nvidia NVDA reported impressive third-quarter results with revenue exceeding the high end of management’s guidance. The firm had strong showings in the gaming and data center segments, with gaming bolstered by the launch of the latest GeForce RTX 30 series GPUs, demand for which has far exceeded supply, and Nvidia’s latest A100 data center GPU. Management noted it may take a few more months for product availability of its new gaming GPUs to catch up with demand, given industrywide capacity constraints and long cycle times. We speculate Samsung (Nvidia’s foundry partner for these GPUs) may be having some issues with its custom 8-nanometer process it’s using to make these products, which could lead Nvidia to go back to TSMC for its next gaming GPU launch. We note Nvidia has also been a longtime customer of TSMC, with its A100 GPUs made at the leading foundry.

We are raising our fair value estimate for Nvidia to $340 per share from $300, which is based upon a 50% probability of Nvidia closing its acquisition of ARM plus our standalone Nvidia value. Our standalone value was raised to $288 from $250 after incorporating the stronger results and outlook for the fourth quarter. If the deal closes, our fair value will increase to $392 per share. 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 $288 fair value estimate, we like that Nvidia is using its rich shares to fund a large portion of the deal.

Third-quarter sales grew 57% year over year to $4.7 billion. Gaming sales were up 37% year over year. Data center sales were up 162% year over year thanks to Mellanox (13% of total revenue), continued adoption of the A100 by cloud customers, and another record quarter for its T4 inference chips. Management expects fourth-quarter sales to be at a midpoint of $4.8 billion, which implies 55% year-over-year growth and was also ahead of our estimates.

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