KeyBanc's Takeaways From Nvidia's Q1 Report

NVIDIA Corporation NVDA reported first-quarter results Thursday that were better than the Street anticipated — but the stock's premium valuation already reflects future growth, according to KeyBanc Capital Markets. 

The Analyst

KeyBanc's Michael McConnell maintains a Sector Weight rating on Nvidia's stock with no assigned price target.

The Thesis

Nvidia said in its earnings report that sales rose 10 percent from the prior quarter and 66 percent from one year ago to $3.21 billion, which beat the $2.9 billion McConnell was modeling, the analyst said in a note. The semiconductor company's sales strength is attributed to GPU sales in the gaming and cryptocurrency markets; sales soared 478 percent from the prior quarter in the cryptocurrency segment, McConnell said. 

Nvidia's 64.5-percent gross margin in Q1 exceeded the 62.7 percent the analyst expected, as the company saw an incrementally more favorable mix of higher sales of premium products during a time of tight channel supply, according to KeyBanc. 

Nvidia's management guided its second-quarter revenue to $3.1 billion, which implies a 3-percent drop from the first quarter and a "sharp" quarter-over-quarter decline in mining GPU sales, McConnell said. While sales to all other business segments are expected to rise and create a more favorable sales mix, the company also guided its gross margin to be lower than Q1 at 63.3 percent.

The semiconductor stock is fairly valued at $261, or 30x McConnell's new fiscal 2020 EPS estimate of $8.70, which implies minimal upside from Thursday's closing price, the analyst said. 

Price Action

Nvidia shares were trading lower by 2.5 percent in Friday's premarket session. 

Related Links:

Nvidia Blows Out Q1 Estimates, Raises Q2 Sales Guidance

Cryptocurrency Mining Grew Faster Than Expected, Bernstein Says In Semiconductor Roundup