BofA Securities analyst Vivek Arya reiterated a Buy rating on Nvidia Corp (NASDAQ:NVDA) with a price target of 550.
The analyst maintained the stock as a top sector pick ahead of its Q2 earnings call, given its dominant position and multi-year runway in transforming $1 trillion+ in traditional global data centers to AI/accelerated computing.
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After last quarter’s shock-and-awe report, Arya expects the mood to be more measured.
Demand is not the problem, notes the analyst. Nvidia’s supply (packaging, memory) and, most importantly, the pace at which US cloud service providers (CSP) can deploy genAI compute instances.
Overall, analyst expects: Q2 sales to be inline/modestly ahead of guidance $11 billion (+64% YoY), including about $7.8 billion -8 billion in data center, and 3Q sales to accelerate to up +100 % YoY vs $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 runs up to $12 billion) are in line with guidance.
Upside supply driven, especially as data center mix shifts to H100 ($30,000 vs. A100 at $10,000), downside risk may be plays that are vulnerable to weak macro trends.
Although NVDA brushed them off at least for Q2, China’s restrictions are a factor. The analyst estimates data center sales of $8 billion, and the sell-side consensus averages $7.7 billion, with a high of $8.9 billion per share. Visible Alpha.
The analyst estimates a gross margin of 70% with upside if the data center mix increases.
Inventory is likely to increase ($6 billion+, 30%+ QoQ) as NVDA prepares to support more CSPs with breadth across A100/H100/Switching.
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Arya will keep an eye on China’s restrictions affecting the A800/H800 stock estimate.
The analyst expects pro forma EPS of $2.04 (consensus high $2.40).
Arya models 3rd quarter total sales of 12.1 billion. USD, up 10% QoQ and solid acceleration to rise 100% YoY, in line with consensus ranging up to $13.9bn. USD, including data center sales for 8.7 billion. mix.
Arya will watch gross margins expand another 100bps to 71% as the data center mix expands.
He assesses. Game sales could grow 11% QoQ to $2.56 billion seasonally, albeit with some macro headwinds.
He expects Proforma EPS of $2.26, with a consensus high of $2.70. Arya’s long-term model is marching towards $20-$25 in long-term EPS.
He predicts that AI servers will grow at a 37% CAGR from 1.23 million in CY23 (8-10% of all servers) to 4.4 million by CY27E (25%+ of all servers), enabling NVDA’s total sales to expand at 26% CAGR to $109 billion and Proforma EPS to grow at a 28% CAGR to about $22/share.
In the short/medium term, he believes investors are looking for FY24E/CY24E Proforma EPS to expand towards $12-$15 vs $11, in current consensus estimates.
Post-earnings reaction could see a near-term stock consolidation after the 200%+ YTD gain (vs. SOX up 46%).
Price action: NVDA shares were trading higher by 0.44% at $448.75 at last check on Monday.
Photo via Wikimedia Commons
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