Banking

Nvidia is up 57% this year and the vast majority of analysts on Wall Street are still bullish. Here are 4 triggers they’re banking on for a continued surge — and 2 reasons the few skeptics say you should beware.

  • Nvidia’s stock price is up 57% year-to-date and analysts are overwhelmingly bullish.
  • According to Bloomberg, 83% of 46 analysts are rating the stock a buy. Only 2 have a sell rating.
  • Insider takes a look at the Street’s most bullish and bearish outlooks on the stock.
  • See more stories on Insider’s business page.

On July 1, Ambrish Srivastava, an analyst at BMO Capital Markets set his price target for shares in US semiconductor Nvidia to $1,000.

This price target was a new high on the Street for the stock, which was trading closer to $800 at the time. 

Around 83% of the 46 Wall Street analysts covering the stock currently rate it a buy, while 13% rate it a hold, according to Bloomberg data.

This bullishness is despite a massive surge in the stock price. It’s up 57% year-to-date and 95% over one year.

Nvidia (NVDA) is currently trading around $820.

Only two analysts, BNP Paribas’s David O’Connor and Morningstar’s Abhinav Davuluri, rate the stock a sell.

Insider took a deep dive into the reports of Nvidia’s most bullish and bearish analysts on the Street to find out what’s so compelling about the company.

Four reasons to be bullish

1) Data center growth

One key revenue stream for Nvidia are its products and services for data centers, which house company computer systems.

Growth in Nvidia’s data center business is booming. And this is expected to continue into the second half of this year, according to Raymond James analyst Christopher Caso.

Caso, who is rated top in Bloomberg Absolute Return Rank (BARR) for Nvidia, currently has a price target of $900.

“As we look further out to the company’s data center business, we now see the business growing to a $32 billion business a few years out vs. our prior expectation of $25 billion,” Srivastava said.

Part of the reason Srivastava raised his target to $1,000 was the firm’s transformation from a data-center business that focused purely on hardware to one that also incorporates software, which is becoming a core area for Nvidia .

2) AI & Software services

Wells Fargo’s Aaron Rakers, who has a $875 price target, believes the focus on software will create recurring revenue opportunities.

Rakers highlights Nvidia’s enterprise AI positioning has been “unrelenting.” The expansion into software further cements this.

“Longer term, we don’t see credible threats to NVDA’s dominance in AI, which we believe will allow them to continue the track record of a 27% revenue CAGR over the past six years,” Raymond James’ Caso said on June 22.

3) The ARM deal

Nvidia is also cementing its AI leadership through the acquisition of British semiconductor company ARM Holdings. The deal is still subject to regulatory approval.

“NVDA’s acquisition of ARM Holdings creates an AI-focused industry leader,” Tigress Financial’s Ivan Feinseth said on June 23.

Feinseth, who is also rated top in Bloomberg’s BARR ranking for Nvidia, has a price target of $920. He expects Nvidia’s strong balance sheet and cash flows to help fund innovation and strategic acquisitions.

Not all analysts expect the ARM deal to go ahead.

“While we don’t expect the ARM deal to be approved, that won’t stop their move into CPU (starting with Grace in 2023), which provides yet another growth avenue for the company,” Caso said on June 22.

Morningstar’s Davuluri said there was a 50% chance it would fold due to potential regulatory scrutiny and ARM customer pushback.

4) Gaming revenues

Gaming revenues have been strong for Nvidia throughout the pandemic and due to the surge in crypto prices.

But it’s removing mining capabilities from newly manufactured gaming cards in response to significant shortages of its own cards. Gaming cards are used by so-called bitcoin miners – people that trawl the network using computers to solve complex puzzles and earn more digital coins.

It will also help to reduce the cryptocurrency risk that has been one of investors’ principal fears,” Caso said on May 18.

However, for some analysts the use of gaming cards by miners is reason to remain skeptical on the stock.

2 reasons to be bearish

1) Crypto mining

In 2018, a correction in the ethereum network’s ether token created a downturn in demand for graphics cards, which impacted Nvidia’s revenues.

Now with the upcoming ethereum update, which moves from a proof-of-work to proof-of-stake mining process, mining demand is expected to drop again. 

Crypto mining still presents a risk to revenue, Caso said on June 22. 

“Either way, we expect that $400 million per quarter revenue to drop to zero by year end, and NVDA management didn’t fight our assumption during our latest conversation,” he added. However, he still expects pent-up demand from the gaming community to underpin consumption.

This risk is also why Morningstar’s Davuluri’s is bearish.

“We believe the true impact is higher and we think a slowdown in gaming GPUs is likely in the back half of calendar 2021,” Davuluri said on April 13.

2) Valuation

The other reason to be bearish is Nvidia’s valuation.

Nvidia is currently trading at 96 times trailing price-to-earnings ratio, showing investors are willing to pay a multiple of at least 96 times the earnings per share for the stock.

Pierre Ferragu of New Street Research says it’s reason to be skeptical. Ferragu, who rates the stock as neutral with a $570 price target, does not believe now is the best time to invest in it.

“Nvidia has reached new highs, but it is difficult to own the stock until we see a pullback materializing,” said Ferragu on May 27.

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