NVIDIA Corporation Earnings Preview: Bears Look For The Tides To Turn

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NVIDIA is scheduled to release its next earnings report after closing bell, and on average, analysts are looking for non-GAAP earnings of 81 cents per share and GAAP earnings of 66 cents per share on $1.9 billion in sales. In last year’s first quarter, the chip maker reported $1.3 billion in revenue, GAAP earnings of 33 cents per share, and non-GAAP earnings of 46 cents per share.

Analysts concerned about NVIDIA’s valuation

Shares of NVIDIA stock rose by as much as 1.17% to $103.93 during regular trading hours ahead of tonight’s earnings release. The stock remains well above its 52-week low of $34.93 after skyrocketing by nearly 200% over the last 12 months, although it’s down by more than 2% for 2017 to date.

The shares have risen so much so fast that some analysts, like Roth Capital Partners’ Brian Alger, have become concerned about valuation. He downgraded NVIDIA stock to Neutral before the company’s last earnings report, although he said in his May 5 research note that his concerns are entirely based on valuation. He said all signs point to continued strength across all of the chip maker’s segments, but at the current valuation, NVIDIA stock is trading at about 30 times non-GAAP earnings estimates.

Is this when the bear thesis on NVIDIA stock plays out?

BMO Capital Markets analyst Ambrish Srivastava downgraded the chip maker further, all the way down to Underperform and set a price target of $85 per share. In his May 7 note, he emphasized that he’s not sure whether tonight’s print will be the one in which his bear thesis plays out. In general though, he expects that as the year goes on, it will become clear that the chip maker is experiencing a slowdown in gaming and facing growing competition in data centers.

He expects the multiple on NVIDIA stock to compress as signs of his bear thesis start to show. Alger noted that about 60% of the chip maker’s business is related to gaming; thus, a slowdown in this area would be particularly troublesome, and AMD has demonstrated that it has NVIDIA in its crosshairs.

Nintendo Switch may help offset weakness

Riley analyst Craig Ellis is less concerned, however, although he reported seeing “signs of choppy China gaming card demand” in his May 8 note. He has a Buy rating and bullish $135 price target on NVIDIA stock and said he expects the new GTX 1080-Ti and Titan Xp to help offset weakness in other areas. He also notes that the chip maker should benefit from the acceleration in Nintendo Switch builds, and it now enjoys new partnerships in data centers and automotive, like Tesla, which started using its chips in its Autopilot system.

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