Why analysts see downsides for Nvidia despite current bullishness

US computer chipmaker Nvidia Corp (NASDAQ: NVDA) is scheduled to report results for the second quarter of fiscal 2021 on Wednesday 19 August 2020 after market close.

Below, we highlight three key considerations that investors should pay attention to ahead of Nvidia’s upcoming earnings report.

Nvidia is now the most valuable US chipmaker

Nvidia’s share price has rallied over 30% since the start of June 2020, with investors keeping bullish on the stock even amid concerns of a global recession.

A month later, the gaming-focused graphics processing unit (GPU) producer was even able to overtake Intel for the first time to become the most valuable US semiconductor company (and third globally) by market capitalisation.

Nvidia’s share price also topped the US$400 mark for the first time that month. More rallies followed after, taking price to a current all-time high of US$468 per share and market cap to US$285 billion.

Analysts said the stock’s steady rise in the last few months can be attributed to two main factors – solid fundamentals and a strong outlook.

Despite disruptions caused by the Covid-19 pandemic, the company was able to post strong revenue and earnings performance in the first quarter of its 2021 financial year. The company’s adjusted revenues of US$3.08 billion, for instance, outdid Zacks Equity Research’s consensus estimate by 2.8% and rose 38.7% year-on-year.

Growth opportunities provided by Nvidia’s expanding data centre and gaming business segments, are also proving to be major catalysts of the company’s latest share price rally.

Data centre revenue grew to approximately US$3 billion in the 2020 fiscal year, up from US$317 million in 2015. With more businesses moving to cloud solutions, demand for data centres – which in turn is driving demand for GPUs are expected to increase even more.

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Wall Street foresees 10% downside for Nvidia stock

Across the board, Nvidia currently has consensus rating of ’buy’ and 12-month share price target of US$420.84 from 42 Wall Street brokers, based on Bloomberg data. The price target represents a downside of 10% from the last traded price of US$462.56.

On a technical basis, IG senior market analyst Shaun Murison wrote that while the share price of Nvidia continues to trade in an upward channel, the stochastic view is giving a ‘short-term overbought indication’.

However, he added that when using these signals in conjunction with each other (trend and overbought), the optimal scenario would be for traders to look for long entry into any potential short-term weakness.

‘A confluence of both horizontal and trend line support at around 428, might be considered the preferred level to look for this long entry, while a move below the low at 390, would instead suggest the failure of the bullish assumptions. Channel resistance at 510 becomes a longer term upside target, provided the uptrend remains in place,’ Murison wrote.

In terms of specific price estimates, Mizuho Securities USA’s equity researchers previously reiterated their share price target for Nvidia at US$400 a share.

Their share price case for Nvidia is predicated on strong GPU demand, as well as an expectation for a strong second half of fiscal 2021 thanks to new product launches and the firm’s continued strong position within the gaming and artificial intelligence (data centre) sectors.

On the flipside, Deutsche Bank analysts were more conservative in their estimates, reiterating a price target of US$315 for Nvidia in a 31 July 2020 report.

The brokers had written that although Nvidia’s potential acquisition of the Softbank-owned chip designer ARM could prove ‘financially viable’, the ‘financial implications for NVDA are difficult to discern as ARM's financials are not as clear as they were when ARM was public’.

Analysts say Nvidia's sales could burgeon 41% in Q2

Analysts polled by Bloomberg have given a mean adjusted non-GAAP earning per share (EPS) estimate of US$1.974 per share against expected revenues of US$3.655 billion for the semiconductor giant’s Q2.

The projected revenue represents a 41% year-on-year increase from Q2 2019.

Bloomberg Intelligence analyst Marina Girgis estimated that Q2 sales may come in at US$3.7 billion for the quarter, with EPS at US$2.14 a share. They theorised that Nvidia remains a long-term organic growth story in semiconductors, with its data centre and gaming portfolios expected to keep gaining.

Nvidia itself foresees Q2 2021 revenue of $3.65 billion, plus or minus 2%. Of this number, it expects Mellanox – which it officially acquired in April 2020 for US$7 billion – to contribute low-teens percentage of combined second quarter revenue.

The company also forecasted that GAAP and non-GAAP gross margins are likely to be 58.6% and 66% respectively, plus or minus 50 basis points.

For existing shareholders, it is probably also worth noting that the company’s reported revenue and EPS have surpassed consensus projections for the last six straight quarters, starting from Q4 of FY2019.

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