Nvidia's $20 Billion Rally Burns Bears in Time for Earnings

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(Bloomberg) -- A record valuation and increasingly bullish predictions from Wall Street have made Nvidia Corp.’s earnings report on Thursday one of the most anticipated of the season.

Nvidia has added almost $20 billion to its market value over the past six sessions with a steady climb that left shares trading at their highest in the company’s 19-year history. Whether the stock can extend that streak will hinge on the performance of Nvidia’s gaming and data center businesses, which account for about 80 percent of revenue. The chipmaker is expected to forecast fiscal second quarter revenue of $2.95 billion, up 32 percent from the year-ago period, according to an average of analyst estimates compiled by Bloomberg.

Nvidia has more than doubled in the past 12 months. Nvidia options are implying a move of 7.2 percent after earnings, in line with the historical average for the Santa Clara, California-based company.

Short interest in Nvidia shares is about 2.7 percent of float, down from a high of 6 percent a year ago, according to financial technology and analytics firm S3 Partners. The stock has 24 buy ratings among analysts, along with 11 holds and two sells. Nvidia is now trading above the 12-month average price target of $255.62.

Here’s what investors will be watching in Nvidia’s report after the market closes:

DATA CENTER

This segment represents Nvidia’s fastest-growing market, fueled by demand for graphics processors powerful enough to support the heavy workloads required for artificial intelligence tasks like machine learning, image recognition and language processing. Sales to data center customers more than doubled in fiscal 2018 to $1.93 billion. Still, the division represented just 21 percent of revenue in Nvidia’s fiscal fourth quarter.

Wall Street is expecting data center revenue to rise 59 percent year-over-year in the first quarter to $653 million, according to Evercore ISI analyst C.J. Muse. He estimates $651 million but said in a research note on May 5 that “our estimate is likely conservative and we could see a $700M revenue number.” He has an outperform rating on the stock.

GAMING

While much of the focus is on the data center business, most of Nvidia’s revenue comes from its gaming division, which sells graphics processors typically used in personal computers. In the fourth quarter, gaming represented 60 percent of revenue.

Wall Street is anticipating first-quarter gaming revenue of $1.55 billion, up 51 percent compared with the same period last year, according to B. Riley FBR analyst Craig Ellis.

Gaming revenue may outperform given better-than-expected personal computer sales in the first quarter and several other indicators that suggest “multi-pronged demand strength and a still-tight gaming card market,” said Ellis, who has a buy rating on Nvidia.

Also included in this segment are cryptocurrency-related sales, which have gotten increasing attention as prices for digital coins have surged in the last several years.

A slump in Ethereum in the first quarter likely contributed to reduced sales to miners by about 50 percent compared with the previous quarter, Susquehanna analyst Christopher Rolland estimates. Despite all the focus, cryptocurrency customers are expected to account for only about 6 percent to 7 percent of Nvidia’s total sales in the first quarter, Rolland said.

©2018 Bloomberg L.P.

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