BofA Securities analyst Vivek Arya reiterated a Buy rating on Nvidia Corp NVDA with a price target of 550.
The analyst maintained the stock as a top sector pick ahead of its 2Q earnings call, given its dominant position and multi-year runway in transforming the $1 trillion+ in traditional global data centers to AI/accelerated computing.
After last quarter's shock-and-awe report, Arya expects the sentiment to be more measured.
Demand is not the issue, notes the analyst. Nvidia's supply (packaging, memory) and, importantly, the pace with which U.S. cloud service providers (CSP) can set up genAI compute instances.
Overall, the analyst expects: 2Q sales to be inline/modestly ahead better than guide $11 billion (+64% YoY), including around $7.8 billion -8 billion in data center, and 3Q sales to accelerate to up +100% YoY towards $12 billion - $12.5 billion (bull-case $13 billion - 14 billion), including data center sales around $8.5 billion - 9 billion (bull-case $10 billion - $11 billion).
Total sales of $11 billion (sell-side consensus ranges until $12 billion) align with the guide.
Upside supply driven, especially as data-center mix-shift shifts to H100 ($30K vs. A100 at $10K), downside risk could be gaming which is vulnerable to weak macro trends.
Although NVDA brushed them off at least for 2Q, China restrictions are a factor. The analyst estimates data center sales of $8 billion, and sell-side consensus averages $7.7 billion with a high of $8.9 billion, per Visible Alpha.
The analyst estimates a gross margin of 70% with an upside if the data center mix increases.
Inventory will likely elevate ($6 billion+, 30%+ QoQ) as NVDA prepares to support multiple CSPs with breadth across A100/H100/Switching.
Arya will watch for China restrictions impacting A800/H800 inventory valuation.
The analyst expects Pro-forma EPS of $2.04 (consensus high $2.40).
Arya models 3Q total sales of $12.1 billion, up 10% QoQ and solid acceleration to surge 100% YoY, in line with consensus that ranges till $13.9 billion, including Data center sales at $8.7 billion consensus, which ranges till $10.5 billion presumably on higher H100 mix.
Arya will watch for gross margins that could expand another 100bps towards 71% as the data center mix expands.
He estimates. Gaming sales could grow 11% QoQ towards $2.56 billion on seasonality, though with some macro headwinds.
He expects Proforma EPS of $2.26, with a consensus high of $2.70. Arya's long-term model marches towards $20-$25 in long-term EPS.
He forecasts AI servers to grow at a 37% CAGR from 1.23 million in CY23 (8-10% of all servers) towards 4.4 million by CY27E (25%+ of all servers), enabling NVDA's total sales to expand at a 26% CAGR to $109 billion and Proforma EPS to grow at a 28% CAGR to around $22/share.
In the near/medium term, he believes investors look for FY24E/CY24E Proforma EPS to expand towards $12-$15 versus $11, in current consensus estimates.
Post-earnings reaction could see near-term stock consolidation following the 200%+ move up YTD (vs. SOX up 46%).
Price Action: NVDA shares traded higher by 0.44% at $448.75 on the last check Monday.
Photo via Wikimedia Commons
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