Raising Our Fair Value Estimate for Nvidia

Nvidia NVDA reported impressive first-quarter results with revenue exceeding the midpoint of management’s guidance. Although it faced supply and demand headwinds related to coronavirus, Nvidia was able to outperform thanks to increased work from home, learn from home, and gaming trends. This dynamic more than offset weaker automotive sales, which is expected to persist over the next few quarters. The firm launched its latest A100 data center GPU on May 14, Nvidia’s first GPU made on TSMC’s 7-nanometer process and part of its new Ampere architecture. The A100 boasts impressive performance enhancements from its predecessor (V100) and contributed to first-quarter sales. We anticipate continued momentum for Nvidia’s data center business, particularly with the inclusion of recently acquired Mellanox in second-quarter results, as customers leverage both Nvidia’s training and inference GPUs in key AI applications such as natural language understanding, conversational AI, and deep recommendation engines. After incorporating Mellanox into our valuation model and the solid near-term outlook, we are raising our fair value estimate to $200 per share from $160. Nevertheless, we 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.

First-quarter sales grew 39% year over year to $3.1 billion. The sharp year-over-year spike can be attributed to an artificially deflated first quarter fiscal 2020 (calendar 2019) due to the massive decline in gaming GPU sales during that period stemming from a decline in demand in GPUs for cryptocurrency mining. Gaming sales were up 27% year over year due to strength across all major products including desktop GPUs and Nintendo Switch chips. Management highlighted a 50% increase in hours played on its GeForce platform during the quarter, as more gamers were forced to quarantine. Data center sales were $1.1 billion, up 80% year over year and 18% sequentially.

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