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Stock Analyst Update

Nvidia Wows but Competition Lurks

The narrow-moat GPU leader maintained its streak of estimate-beating results, but shares are absurdly priced.

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 NVIDIA (NVDA) recorded its 11th consecutive quarter of beating estimates while also providing guidance above consensus for the following period. Every major segment enjoyed year-over-year revenue growth, with gaming, data center, and OEM businesses leading the way. While this recent string of success is a testament to the versatility of Nvidia’s GPUs in being leveraged in numerous end-markets, we anticipate a need for greater specialization in future offerings for each sub-segment coupled with materially higher competitive forces. The artificial intelligence, or AI, addressable market was quantified by management at $50 billion by 2023 (extended from $30 billion by 2020) in the data center and $60 billion by 2035 for autonomous driving, or AD. Our unchanged $120 fair value estimate for this narrow moat GPU leader reflects our outlook that these gaudy market opportunities will not be conquered solely by Nvidia, despite what current stock levels seem to imply.

First-quarter sales increased 66% year-over-year and 10% sequentially to a record $3.2 billion. Nvidia’s main breadwinner, gaming, was up 68% year over year and down 1% sequentially to $1.7 billion, as its GPUs continue to garner impressive demand both in gaming PCs and the Nintendo Switch. Cryptocurrency-related GPUs generated $289 million in sales, categorized in the OEM bucket, but we question how accurately this figure captures Nvidia’s true cryptocurrency exposure. We think a portion of GPUs sold in the gaming channel actually go to cryptocurrency mining or data center acceleration, thus artificially inflating the growth figures. While this could suggest the data center figure is higher, we remain skeptical on the long-term sustainability of Nvidia’s GPUs for cryptocurrency mining, particularly as cryptocurrency prices have fallen recently. If the secondary market gets flooded with GPUs previously used for mining, Nvidia and AMD’s GPU businesses (especially in gaming) would be severely impacted, in our view.

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Abhinav Davuluri does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.