Nvidia would release its fiscal third-quarter 2022 earnings this week. Here’s what analysts are expecting from the company and the forecast for the shares in the fourth quarter of 2021.
Nvidia shares have been on a fire this year and are up 132%. It is now the largest chipmaker by market cap. Notably, the shares had soared last year also. Nvidia was among the top-performing S&P 500 share in 2020 also.
It is among the are names that are among the top-performing shares in both 2020 and 2021. Otherwise, the price action of 2021 is somewhat a mirror opposite of 2020. Even in the FAANG space, both Apple and Amazon, which outperformed last year, are underperforming this year amid concerns over slowing growth.
Nvidia earnings estimates
Analysts polled by TIKR expect Nvidia’s revenues to rise 44.1% to $6.8 billion in the quarter. The company’s adjusted EPS is expected to rise 48.5% over the period and reach $1.08. The growth looks splendid. However, going forward analysts expect the company’s topline growth to gradually come down.
Nvidia had given a revenue guidance of $6.8 billion for the quarter with a variance of 2%. Analysts’ estimates are in line with the company’s guidance. However, given the fact that companies usually provide conservative guidance, Nvidia might surprise on the upside.
What to watch in the earnings call?
During Nvidia’s earnings call, markets would watch out for commentary on the growth outlook amid concerns over a slowdown in growth. Also, the company might provide an update on the deal to acquire Arm Holdings from SoftBank. As part of the $40 billion deal with Nvidia, SoftBank was to get $2 billion as cash and the remaining in the form of Nvidia shares. Arm Holdings designs architecture for chips used in almost all android mobile phones. Its design is also used in Apple’s iPhones. After the Arm acquisition, Nvidia would occupy the pole position in the chip supply to smartphone companies. Nvidia would become a formidable challenger to Intel after the Arm acquisition.
Nvidia-Arm Holdings deal has been controversial
The deal has been facing regulatory scrutiny in the UK. The UK competition watchdog CMA (Competition and Markets Authority) is investigating the takeover of Arm by Nvidia. “The CMA will look at the deal’s possible effect on competition in the UK. The CMA is likely to consider whether, following the takeover, Arm has an incentive to withdraw, raise prices or reduce the quality of its IP licensing services to NVIDIA’s rivals,” the watchdog said in its release earlier this year.
During the second-quarter earnings call, NVIDIA said “We are working through the regulatory process, although some Arm licensees have expressed concerns and objected to the transaction. And discussions with regulators are taking longer than initially thought. We are confident in the deal and that regulators should recognize the benefits of the acquisition to Arm, its licensees and the industry.”
Arm Holdings acquisition update
Reportedly, the UK is expected to study the deal on national security concerns. Hermann Hauser, a co-founder of Arm is among those opposing Nvidia’s acquisition of Arm Holdings. “It’s the last European technology company with global relevance and it’s being sold to the Americans,” he had said last year when the deal was announced. Hauser also started a “Save Arm” campaign to block the sale of the company to Nvidia.
Meanwhile, using national security as a pretext to block a transaction would not be a first. Former US President Donald Trump cited national security to block MoneyGram’s sale to Alibaba-backed Ant Financial. The administration also imposed tariffs on US steel and aluminium imports, even from friendly countries, citing national security.
Meanwhile, Wall Street analysts are in general bullish on Nvidia shares. According to the estimate forecasts compiled by CNN Business, Of the 43 analysts covering the shares, 34 have rated it as a buy while seven rates it as a hold or some equivalent. Two analysts have a sell rating on the shares.
However, analyst action has not kept pace with Nvidia’s price action. It has a median price target of $240, which a discount of 21% over current prices. Its highest price target of $400 is a premium of 31.6% over current prices, while its lowest price target of $130 is a 57.2% discount over the current share price.
The steep rise in Nvidia shares has been making some analysts apprehensive about the valuation. Last week, Wedbush Securities analyst Matt Bryson downgraded the shares from a buy to neutral even as he raised the target price from $220 to $300.
“While we remain very bullish on both Nvidia’s near-term prospects and longer-term opportunities (particularly around AI), we simply find ourselves unable to justify lifting our multiple to levels that would continue to justify an outperform,” said Bryson in his note. He however added “While typically we would want to tie a rating change to some sort of negative catalyst; frankly there is none. Conditions rather have only improved for NVDA over the past three months.”
Jim Cramer believes that the market expectations from Nvidia would be quite high when it reports this week. The company would need to justify the steep rise in earnings with commensurate financial performance.
Nvidia has now become the seventh-largest company by market cap, ahead of Warren Buffett’s Berkshire Hathaway. The company sees metaverse as a key driver going forward. Commenting on metaverse, CEO Jensen Huang said “It is a 3D extension of the internet that is going to be much, much bigger than the 3D physical world that we enjoy today.” He added, “the economy of the virtual world will be much, much bigger than the economy of the physical world. You’re going to have more cars built and designed in virtual worlds, you’ll have more buildings, more roads, more houses — more hats, more bags, more jackets.”
Meanwhile, despite upwards earnings revisions, Nvidia shares currently trade at an NTM (next-12 months) PE multiple of almost 72x. While Nvidia looks among the best long-term share with a strong management team, the shares appear a bit stretched at these valuations.
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