Nividia's (NVDA) nice rebound in gaming and its fortutitous forecast on cloud demand is buoying a bounce for the stock into the week's close, but many analysts are advising a modicum of caution as significant upside appears elusive.
Shares of the semiconductor stalwart surged at mid-day after reporting earnings on Thursday evening, gaining nearly 7% and reversing much of the slide that kicked off the month of August.
Gaining on Gaming
Nvidia's move on Friday is largely driven by the recovery of its gaming segment as it continues to release top of the line GPUs.
"We believe Nvidia continues to execute across all segments," J.P. Morgan analyst Harlan Sur said, highlighting the positive print. "While 1H is typically seasonally weaker than 2H, we expect solid demand in PC gaming to be a strong revenue driver for the company, offsetting PC OEM, which is in secular decline."
The upside noted by Sur is particularly tied to strength in gaming as ray-tracing begins to take off after a slow start.
Yet, while analysts largely agree that gaming is gaining, the increased competition from Advanced Micro Devices (AMD) for lower-end gaming chips and the lack of firm forecasts on demand ahead remain risks.
"Our view continues to be that overall demand for Turing is OK, but that there is still room for improvement - ray tracing support is sporadic at best," Morgan Stanley analyst Joseph Moore advised. "We still don't see AMD as having impact in higher-end gaming products or in higher- end AI "training", but from a percentage basis, AMD has had more impact on NVIDIA's business than they have had on Intel's (INTC) , yet Intel's multiple has suffered much more for it."
A reevaluation of that relationship across firms could certainly impact the stock adversely.
That is not to mention the company's overall exposure to China, its second largest market by revenue share, particularly in gaming. With that in mind, the stock and the underlying segment remain very much subject to macroeconomic moves that have proved exceedingly volatile.
Contending with Cloud Demand
While Moore agreed that the gaming segment should serve as a long term positive for investors and considers the name a "core holding", the current valuation leaves its forward looking impact hard to forecast, with a recovery in cloud much more important to raising targets.
"The challenge is that we don't see much upside to those numbers,and the stock already trades at 26x our 2020 estimates," he concluded. "To get multiple expansion we will need to see more evidence of a cloud recovery."
That very recovery remains the key sticking point of debate among analysts tweaking estimates on Friday.
"Looking forward to the 2HCY19, the Datacenter recovery remains elusive and continues to be a worry," Deutsche Bank analyst Ross Seymore said. "Longer-term, we continue to see NVDA well positioned across a number of vectors (Datacenter, Provis, Automotive). However with little change to our longterm EPS estimates, datacenter uncertainty remaining elevated, and an already premium valuation, we continue to see the stock as fairly valued."
As a result of unsure footing in the key growth segment for the company, Seymore was not able to assign much of a premium to shares and retained his "Equalweight" rating.
"We remain unsure of the multi-year growth rate for NVDA's Gaming andDatacenter segments, and await a time when we begin to receive more visibility on growth going forward," Seymore concluded.
While many are encouraged by the earnings results, as evidenced by the stock move and semi sector bounce on Friday, there is reason to tread cautiously even if there are strong gains in the immediate term.
"We are unsure what the follow through will look like into what should be a seasonally better January, let alone the macro issues at play," Barclays analyst Blayne Curtis concluded. "We didn't get any red flags but we didn't leave feeling better either and stock may have good day but is likely range bound given the overhang and sell through risk into seasonal period."
Nvidia's historical chart action also underlines the advisement of careful trading in months ahead.
"The dominant trend has been sideways for several months," Real Money technical analyst Bruce Kamich observed. "NVDA is probably going to need more sideways price action signs of accumulation before a sustained upside move gets underway."
For more on the charts Kamich is watching, click here.