Nvidia stock gains as data-center business cheered though crypto concerns remain

Rapid growth in Nvidia Corp.’s data-center business helped power another strong quarter of results that pushed shares higher Friday, and supporters don’t see that momentum letting up.

Though not Nvidia’s NVDA, +6.21% largest business, the server segment is its fastest-growing. Revenue rose 105% year-over-year in the January-ended quarter, to $606 million, ahead of the FactSet consensus estimate for 85% growth. That’s one big reason why Nvidia shares gained in Friday morning trading.

“We believe this dynamic demonstrates consistent demand for Nvidia’s leading-edge data center products, driving [average selling price] and margin strength,” wrote Oppenheimer analyst Rick Schafer. He noted that the company’s V100 product already has a number of high-profile adopters, including Alibaba Group Holding Ltd. BABA, +0.75% , Amazon.com Inc. AMZN, -1.76% Alphabet Inc. GOOGL, +2.07%GOOG, +2.00% , Baidu Inc. BIDU, +1.38% International Business Machines Corp. IBM, -0.26% Microsoft Corp. MSFT, +1.55% Oracle Corp. ORCL, +0.11% and Tencent Holdings Ltd. 0700, -3.05% Schafer has a perform rating on Nvidia shares.

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Raymond James analyst Chris Caso is also optimistic about Nvidia’s data-center business, pointing out that sales of Volta GPUs are still ramping up.

“With only two cloud customers on Volta, the rest are still deploying Pascal-related boards, suggesting another strong leg up is yet to come in that market,” he wrote.

Caso added that the data-center business is likely the major factor behind Nvidia’s big rally over the past year, with shares up 95% in that time versus a 12% gain for the S&P 500 SPX, +0.23% and a 27% rise for the Philadelphia Semiconductor Index SOX, +0.70%

“We don’t think we’re anywhere near the end of the Volta product cycle,” he wrote, while maintaining an outperform rating. “The stock’s valuation is of course high, but as long as the company keeps putting up quarters like this, and with future potential catalysts from auto and inferencing ahead, we believe shares will continue to move higher.”

Nvidia’s automotive business fell short of expectations for the second straight quarter, but analysts seemed nonetheless optimistic about that segment going forward.

“Concern over [whether] Nvidia can maintain the momentum fails to recognize an additional autonomous vehicle tailwind ramping significantly in FY20,” wrote Needham’s Rajvindra Gill, who has a buy rating on the stock. He raised his target price to $300 from $250.

Cryptocurrency-related revenue delivered a nice boost to Nvidia’s results during the latest quarter, given that its gaming chips have proven useful for crypto mining. With Ethereum prices down sharply, however, there’s some debate over the potential impact of this business on Nvidia’s results in the future.

In a note titled “Love the Data Center... Hate the Crypto,” Susquehanna Financial Group analyst Christopher Rolland dubbed sales of GPUs for Ethereum mining a “long-term negative” for Nvidia. He noted that the company issued a strong forecast for its fiscal first quarter, which ends in April, and worries that “potentially fleeting crypto GPU sales may set 2Q18 guidance up poorly.”

Some analysts believe that Ethereum will shift from Proof of Work protocol to Proof of Stake protocol in the first half of the year, which could hurt Nvidia and Advanced Micro Devices Inc. AMD, -1.11% Proof of Work requires GPU mining, while Proof of Stake doesn’t.

Rolland believes that Ethereum-related sales of GPUs may have exceeded $400 million in the fourth quarter of the calendar year. He has a neutral rating on shares, and he raised his price target to $215 from $200 following the results.

Needham’s Gill, who estimates about $140 million in crypto revenue for the fiscal fourth quarter, also warned that “high crypto mining demand and potential volatility could spill off and cause fluctuations in the Gaming business.”

Raymond James’ Caso isn’t concerned when he looks at the overall business. “While investors are likely to question the sustainability of recent crypto-driven strength—and its impact on tight supply—management is taking a relatively conservative approach, assuming flat crypto demand in April and highlighting pent-up “traditional” gaming-driven demand,” he wrote.

At least 20 analysts increased price targets on Nvidia stock Friday morning, according to FactSet, though none changed their ratings.

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