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Bull of the Day: NVIDIA (NVDA)

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Note: This is an updated and expanded version of my May 14 article Do You Buy NVIDIA at This Valuation? after EPS estimates rose further, making NVDA a Zacks #1 Rank yet again. Plus, the semi-annual TOP500 Supercomputer List was released last week, showing NVIDIA's continued dominance in hyper-scale data and machine learning applications. 
 
On June 25, the semi-annual TOP500 List was released and for the first time since November 2012, the US claimed the most powerful supercomputer in the world. And it should be no surprise that NVIDIA ((NVDA - Free Report) ) makes some of the key GPU (graphical processing unit) semiconductor hardware involved.
 
This key industry ranking found that an IBM-built supercomputer called SUMMIT, now running at the Department of Energy’s Oak Ridge National Laboratory, captured the number one spot with a performance of 122.3 petaflops on High Performance Linpack (HPL), the TOP500 List benchmark.
 
SUMMIT has 4,356 nodes, each one equipped with two 22-core Power9 CPUs, and six NVIDIA Tesla V100 GPUs. The nodes are linked together with a Mellanox (MLNX) dual-rail EDR InfiniBand network that can run bandwidth of 100G/sec.
 
What's a FLOP?
 
A "petaflop" is the ability of a computer to do one quadrillion floating point operations per second (1,000 million million). For comparison's sake, the new Microsoft ((MSFT - Free Report) ) Xbox One X gaming system has 6 "teraflops" that allow it to perform 6 trillion floating point operations per second.  
 
So each SUMMIT is roughly equivalent to the processing power of over 20,383 Xbox One X consoles (assuming they were somehow connected).
 
But after going through the full TOP500 ranking, to say that NVDA GPUs are a key element of the number one supercomputer seems like an obvious understatement. Not only are NVDA chips in 5 of the top 10 systems, nearly 90% of listed supercomputers with GPU accelerators (98 of 110 out of the total 500) used its designs, up from 85.5% six months ago.
 
Stifel Nicolaus analysts commented on the broad trends in super-computing demand across industry, university research institutions, and government...
 
"We expect NVIDIA’s GPU initiatives, as well as AMD entering the high-end of the market with its Vega GPUs, will result in continued share gains for accelerated systems in future TOP500 lists, as supercomputers are increasingly custom-designed for unique workloads."
 
While NVIDIA remains dominant in many new datacenter applications, including the core AI applications of machine learning (training) and deep learning (inference), we should intuitively know that major tech players like Intel ((INTC - Free Report) ), Microsoft and Amazon ((AMZN - Free Report) ) are not sitting idly by and letting the industry hardware and software capabilities be dictated to them.
 
And let's not forget the exploratory forays into high-performance computing (HPC) hardware by Alphabet ((GOOGL - Free Report) ) recently to give its Tensor Flow machine learning software a place to run and play...
 
 
Nonetheless, his highness still appears ensconced for now. Following the king's earnings report, the average price target on NVDA shares rose to over $275, even including the bearish view of the Wells Fargo semiconductor analyst David Wong. 
 
What's a Fair--and Safe--Price to Pay?
 
But with all the new $300 price targets (coming up, I share 20 of the top moves), it's fair to wonder if NVDA is still a safe investment, and over what time period.
 
I know many investors who are hanging on to gains of double and triple in NVDA and their conviction is strong to stay long because they view the company as a a dominant disrupter, a game-changer for so many industries it has helped create in big data research and monitoring, automation, autonomous vehicles, AI and many other advanced software applications.
 
They envision the stock above $300 one to three years from now so they don't care about the short-term volatility if it should rally to $270 and fall back below $240.
 
Meanwhile, I also know many agile traders who prefer to trade the swings from quarter to quarter. They can pick good entries when the crowd is fearful and then ride the next wave of euphoric chasing up to new highs above $275 sometime this year. But as always, they will have to be quick and careful if it's only a trade.
 
To give you more background on the new fundamental and technical trading range for NVDA shares, the following is how I described the valuation situation to my TAZR Trader subscribers in May after earnings...
 
NVIDIA Continues to Impress
 
Another solid beat and raise quarter from the "King of AI" showed that Gaming demand remains strong in the current quarter on continued blockbuster titles and e-sports strength. And in Data Center, mid-single-digit percentage sequential growth and strong year-over-year growth look to continue their trends.
 
All the noise about slowing Crypto isn't even worth our time to discuss since any reasonable investor/analyst knew that this was just temporary gravy and not a core business unit.
 
And so the price action in NVDA on Friday was predictable and comical. Sellers couldn't even touch $250 and shorts were getting worried. Especially with more beefy price target bumps...
 
PT to $340 at BofA/ML: "Leadership in AI" rules stock sentiment/valuation 
PT to $325 at Needham: "Dominating in AI Today and Future plus Auto Tailwinds"
PT to $320 at Jefferies: "Another Blowout - Crypto DeRisked"
PT to $316 at SunTrust
PT to $315 at Rosenblatt
PT to $310 at Goldman Sachs: "Data Center Strength Makes NVIDIA A Buy"
PT to $300 at Sanford Bernstein
PT to $300 at Citi: "Old Bull Case is Now Base Case; New Bull Case = $380"
PT to $300 at RBC Capital
PT to $300 at Barclays
PT to $300 at B.Riley/FBR: Estimates rise "meaningfully" as catalysts persist
PT to $280 at Mizuho Securities
PT to $273 at Morgan Stanley
PT to $266 at UBS
PT to $260 at Deutsche Bank: "Channel and Crypto Drive Upside"
PT to $255 at MKM Partners: "Valuation" = Not a Buy
PT to $255 at JPMorgan
PT to $250 at Susquehanna
PT to $243 at Stifel: "GPU Use Expands in AI, Gaming, Visualization & Crypto Mining"
PT to $140 at Wells Fargo (David Wong persists in his bearish stance, against all reason)
 
And from my favorite chip analyst, William Stein over at SunTrust, we get this measured optimism as always...
 
SunTrust analyst William Stein raised his price target on NVIDIA to $316, saying that while concerns around crypto unit volume may cause profit-taking, the company would have beat expectations even excluding that segment. The analyst adds that NVIDIA fits his mold that favors "structural growth stocks" based on its performance in the datacenter, gaming, and potential for automotive businesses. Stein raised his FY19 (ends January) EPS target to $8.23 from $8.08.
 
I also like the somewhat tempered enthusiasm of the analyst at Citi, who explains why his Bull Case is now $380...
 
Citi analyst Atif Malik raised his price target for NVIDIA to $300 following Thursday's Q1 results. Strong gaming demand coupled with the strength of the Volta architecture in the data center have driven NVIDIA's revenue and earnings higher and faster than expected. Malik continues to see upside in the stock and take his bull case for shares up to $380. 
 
And RBC's Mitch Steves makes some good points about the revenue growth and business model leverage...
 
RBC Capital analyst Mitch Steves raised his price target on NVIDIA to $300 and kept his Outperform rating after "another material beat" in the latest reported quarter, adding that the margin of revenue outperformance also exceeded the prior beats. Steves noted that even though the gaming sector was "a bit lighter", it is offset by "significant" expansion in operating and gross margins, highlighting the clear and dominant leverage in the company's model.
 
(end of TAZR May 12 excerpt)
 
And since then, we heard from Cowen & Co. with a "late-cycle" initiation of coverage (probably a change of analysts, to be fair) at Outperform with a $325 PT.
 
The i-bank is expecting the chipmaker to dominate the autonomous driving and artificial intelligence markets.
 
That sounds like my familiar refrain of the past year. Analyst Mathew Ramsay explained thus...
 
"While datacenter and gaming/crypto understandably garner the majority of investor focus, we believe NVIDIA's auto computing business is on the cusp on significant high-margin growth," Ramsay said, adding that no silicon company has the breadth of solutions and partnerships that NVIDIA has accumulated for end-to-end autonomous driving solutions.
 
"We view NVIDIA as the premier AI-driven growth story in semis and possibly the tech industry," Ramsey elaborated.
 
Who Wasn't Impressed?
 
Besides the staunch bear at Wells Fargo -- David Wong believes competition will easily rise, thus cutting into NVDA's sales and making its valuation ridiculous -- I think we also need to pay attention to the reasonable analysis and views of those who were not so impressed, given the current rich valuation...
 
Deutsche Bank analyst Ross Seymore raised his price target for the shares to $260 from $240 but continues to believe the company's growth potential is fairly reflected in the "premium valuation." He explains his "Hold" rating by noting that while NVIDIA's growth remains "strong across virtually every segment," the quality of Q1's beat was "somewhat lower" as GPU channel fill and cryptocurrency delivered the majority of the upside, while Data Center was slightly below expectations. 
 
MKM Partners analyst Ruben Roy raised his price target on NVIDIA to $255 after another beat-and-raise quarter, noting revenues saw broad growth across all segments. While Roy acknowledged that management warned crypto-based demand and related revenue are expected to decline to roughly 1/3 of the Q1 level in Q2, he's also concerned about seasonal fluctuations in Gaming that make it difficult to assess how the company's leading segment performs the rest of the year. His "Neutral" rating is based on a view of the company's valuation as "meaningfully higher" than that of its peers.
 
And Stifel Nicolaus analysts explain their valuation call that is typical of many who want to curb their enthusiasm...
 
"12-month target price to $243 from $220, based on 33X our upwardly revised FY2019 non-GAAP EPS estimate."
 
That's it. Just 33X. That's all they want to pay. This sentiment is what we began to notice during this recent market correction: the market as a whole did not want to pay more than 40X anymore as the hot segment growth rates potentially cool.
 
But we need to break that down a little more. First, a picture that's worth a thousand-fold increase in computing power will help us visualize the exponential growth of new industries created by the king of AI.
 
The below graphic comes from an NVIDIA presentation that I reference in my recent video and article The Technology Super Cycle, where ironically I talk about Stifel analyst Kevin Cassidy with the Street-high target on Micron ((MU - Free Report) ) of $106...
 
 
Clearly, what NVDA is doing with GPU semiconductors to fuel the advance of AI is beyond anything we've witnessed before in technology. If you need a primer on what a GPU accelerator is and how it works to create AI, check out my video blog from early 2017 (only 9 minutes!)...
 
 
Where Do You Buy the King of AI in this New Valuation Range?
 
The valuation math from Stifel Nicolaus analysts is based on a FY19 (ending in January) EPS of $7.36 which was slightly above consensus in late May.
 
But in the past month, all the upward EPS estimate revisions have been filtered into and vetted by the Zacks Rank quantitative model to produce a new and higher consensus of $7.93. 
 
And next year has risen from $8 to $8.50. So let's give growth investors the benefit of the doubt and look out to next year's consensus of $8.50.
 
What should we pay for that?
 
More importantly, what will the other guy pay for projected slowing growth that looks like this...
 
 
My answers? I still think you can pay 30X for this growth because analysts are always behind on being able to estimate what NVDA will earn next year. I've seen it quarter after quarter for over 2 years now. So here's my simple math for the new NVDA valuation and trading range...
 
27 X $8.50 = $230
 
33 X $8.50 = $280
 
We are near the bottom of the new, more conservative valuation range. (Don't let the high Street targets above $300 fool you into thinking we get there this summer, although anything is possible in markets).
 
I told my subscribers in May that we wanted to add to our NVDA position under $240, and it didn't dip even 1-cent below after earnings and before running to new highs just above $269 in June. Some big funds apparently had the same idea.
 
But now the White House trade war has turned to the technology and intellectual property battles where protecting US tech/IP from China's "2025" plans is a vital national security priority. You can learn more about those battle plans in this video and article I made last week...
 
So I will play this new valuation range for all its worth, as a buyer near 27 times and a seller on rabid chasing up to 35X, or nearly $300.
 
And NVDA will make new highs again, whether by August or December.
 
Disclosure: I own shares of NVDA and MU for the Zacks TAZR Trader portfolio.
 
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service. Click "Follow Author" above to receive his latest stock research and macro analysis.
 
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