KeyBanc Has Valuation Concerns With Nvidia's Stock

NVIDIA Corporation (NASDAQ: NVDA) reported a strong earnings beat, but wasn't strong enough for at least one analyst to turn bullish on the stock.

The Analyst

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

The Thesis

Nvidia's fourth quarter report consisted of a revenue beat on strong sales of GPUs to the datacenter end market, the gaming end market, and for use in cryptocurrency mining, McConnell said in a note. Gross margin of 61.9 percent came in ahead of the 59.7 percent the analyst expected due to a favorable mix of higher-margin datacenter segment sales, while a lower-than-expected tax rate also helped the company report an earnings beat.

Nvidia's report offset the analyst's prior concerns on growth in the gaming segment, but the company's guidance came in flat. Management guided its first quarter revenue to be $2.9 billion, which implies zero growth from the fourth quarter but 50 percent year-over-year.

Nvidia's valuation needs to be taken into consideration. The analyst's fair value for Nvidia's stock at $206 is based on a 25 times multiple on his new fiscal 2020 earnings per share estimate of $8.25 and implies the stock has downside potential. A bull-case scenario would value the stock at $265, while a bear-case scenario would see the stock valued at $191.

Price Action

Shares of Nvidia were trading higher by more than 9 percent at $237.50 early Friday morning.

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Image Credit: yoggy0 from Yokohama, Japan (SIGGRAPH Asia 2009) [CC BY 2.0], via Wikimedia Commons