Nvidia Analysts Upbeat Following 'Impressive' Q3 Results, Shrug Off Looming Data Center Softness

Nvidia Corporation NVDA reported strong quarterly results and issued above-consensus guidance for the fiscal fourth quarter.

The Nvidia Analysts: Needham analyst Rajvindra Gill maintained a Buy rating and $700 price target on Nvidia shares.

Mizuho Securities analyst Vijay Rakesh reiterated a Buy rating and increased the price target from $575 to $605.

Raymond James analyst Chris Caso reiterated an Outperform rating and lifted the price target from $500 to $600.

KeyBanc Capital Markets analyst Weston Twigg maintained a Sector Weight rating.

RBC Capital Markets Mitch Steves maintained an Outperform rating and $610 price target.

Rosenblatt Securities analyst Hans Mosesmann reiterated a Buy rating and raised the price target from $600 to $650.

Wells Fargo Securities analyst Aaron Rakers maintained an Overweight rating and $605 price target.

Q3 Boosted By Gaming, Data Center: Nvidia's results were driven by gains in Gaming, thanks to very high demand for its new 3000 series GPUs based on 7 nanometer Ampere architecture and record Data Center revenues, Gill said in a note. Hyperscaler demand was extremely strong as A100 continues to ramp.

Going into 2021, inference represents the next leg to the growth story in data center where the vast majority of AI inference is done by CPUs.

"We believe GPUs are a superior option (100-200x faster) that CPUs, and we expect accelerated adoption of GPU-based accelerators, specifically with recommender engines and NLP," the analyst wrote in the note.

Once supply constraints on gaming GPUSs eases, Nvidia's top line could see even more rapid growth. Needham raised its 2022 EPS estimate to $11, with earnings power boosted to $13-$14 with Arm.

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Mizuho Sees Strong Leadership Position For Nvidia Into 2021: The October quarter top-line growth was primarily due to a 162% year-over-year growth in Data Center, which received support from Mellanox and strong A100 uptake, Rakesh said. Gaming saw 37% growth, with RTX Ampere and strength with Nintendo Switch.

For the January quarter, Nvidia looks ahead to further gaming growth in a typically seasonally weaker quarter and modestly softer Data Center. The softness in Data Center, the analyst said, is due to a quarter-over-quarter decline at a single China OEM, despite growing hyperscale.

Mizuho believes continued strong gaming and AI/data center leadership position NVDA well into 2021.

No Other Company Is Growing 50% Year-Over-Year:' Nvidia's fourth quarter will benefit from an extra week, although the benefit from it is debatable, given the company remains supply constrained on both Gaming and Data Center products, Caso said.

The analyst shrugged off investor concerns over Huawei revenues for Mellanox declining sequentially.

"Most important to us is that NVDA continues to post revenue at a 50% Y/Y growth rate, they still can't get enough product to satisfy all demand, and the reception of these new products – from gaming to training to inference – appears to be extremely strong," the analyst wrote in the note.

Although valuation isn't inexpensive, Raymond James pointed out that there isn't any other company in the space growing at 50%. The firm continues to be positive on Nvidia.

Valuation Keeps KeyBanc On The Sidelines: Nvidia continues to benefit from tailwinds in Artificial Intelligence/Machine Learning, its unique software stack and new hardware and certain pandemic-related tailwinds in gaming and datacenter, Twigg said.

While raising estimates moderately, the analyst remains sidelined due to higher relative valuation.

RBC's Key Takeaways From Earnings Call: Core Data Center revenue, excluding Mellanox, is expected to be up mid-single digits quarter-over-quarter, Steves said.

Mellanox represented about 13% or $600 million of Nvidia's revenues in the third quarter. The analyst expects Mellanox revenues to be closer to $500 million in the fourth quarter.

Nvidia indicated Gaming revenues, which increased 37% both year-over-year and sequentially, are not seeing meaningful contribution from cryptocurrency mining sales, the analyst said.

The guidance implied operating margin of over 40% in the fourth quarter after the 40% mark in the third quarter.

"While the gross margin guidance was a bit lower than expected we see no change to the long-term NVDA thesis," the analyst said.

Rosenblatt Will Use Weakness To Accumulate Shares: The results and demand outlook in gaming and compute that are both in a supply-constrained mode for the next one to two quarters are impressive, Mosesmann said.

The setup for gaming in 2021 is that Nvidia has yet to release mid-to-low end Ampere desktop products and notebook GPUs.

"For the strategically important Data Center compute part of the business, the new Ampere is merely at the early stages of a multiyear acceleration cycle," Mosesmann wrote in the note.

The analyst would use potential sell-on-the-news and/or some confusion about Huawei decline in the January quarter to accumulate shares.

NVDA Price Action: Nvidia's stock traded around $538.38 at publication time.