Why Is Wall Street Talking About Nvidia?

hosted its Annual Analyst Day in San Jose, California on March 17, 2015. The company outlined growth opportunities around high performance computing, graphics virtualization and gaming, against the backdrop of concerns surrounding its PC OEM business. NVIDIA guided to FQ1 revenue of $1.16 billion (-7% q/q) and gross margin at 56.2%, even after Intel's negative preannouncement, while noting that the company has little sales exposure to corporate PCs. Pacific Crest Securities analysts noted in a report published Wednesday, "High-end desktop GPU share gains are likely to allow NVIDIA to meet or exceed consensus estimates in the near to medium term. Uncertainty around the end of Intel cash payments after calendar 2016 remains a long-term concern." "The long-term goal implies annual cash returns of $590 million based on our estimated free cash flow for the company this fiscal year," the analysts said, while adding that this target could "prove challenging" unless NVIDIA "(1) levers up its balance sheet ($1.4 billion of debt) even further, and/or (2) garners meaningful cash flow from the ongoing Samsung/Qualcomm IP infringement suit." Deutsche Bank analysts pointed out that the company has reiterated its "commitment to bringing a systems approach to vertical markets to bolster its PC-related core businesses." "While we expect non-PC growth drivers to remain robust, we believe much of this is reflected in the stock valuation, and we expect recent PC volatility to be a headwind," the analysts added. Deutsche Bank has a Hold rating on NVIDIA and a price target of $19. Jefferies analysts also maintained a Hold rating, with a price target of $22. "NVDA's transformation from traditional component supplier to platform provider has enabled it to expand its TAM into software & services, and grow its revenues and gross margins," the analysts wrote. However, the stock has a premium valuation and limited capacity for capital return, without "repatriating overseas cash and increasing its tax rate," Jefferies added. Morgan Stanley analysts, who have an Underweight rating and $19.50 price target, said that the company does not seem to be "immune from PC growth concerns." Although NVIDIA differentiates between its PC OEM business and PC gaming graphics, "we still see only moderate growth in the PC graphics total available market. We note that the company classifies substantial high end OEM and white box business as "gaming", not OEM, so we tend to look at the numbers more in aggregate," the analysts added. In a report published Wednesday, Oppenheimer analysts noted, "We've been warming up to NVDA's Enterprise (Quadro/GRID) story over the last several quarters, and while still early innings, we believe the long-term opportunities within these businesses should help NVDA ride the structural declines in PC OEM to a soft landing." Although the San Jose event helped the analysts become "incrementally more positive" about NVIDIA's business strategy and prospects, the report said, "with most of these opportunities just beginning to take root, we believe declining PC attach rates and limited earnings leverage likely keep shares range bound." Oppenheimer has a Perform rating on the company.