Nvidia Corp. (NVDA): 2019 Top Picks' Mid-Year Update

07/09/2019 5:00 am EST


James Kelleher

Director of Research & Senior Analyst: Technology, Argus Research Corporation

Jim Kelleher, an analyst for Argus Research, selected Nvidia (NVDA) as his top speculative investment idea for 2019. The stock has since risen 24%. Here's his update on this leading graphics chip maker.

Buy-rated NVidia Corp. continues to post negative annual returns but is seeing slightly more positive signs in its core end markets. These include gaming, hurt by crypto demand collapse, and data center, which has been impacted by inventory absorption at the cloud titans.

Those markets showed hopeful signs in fiscal 1Q20 (ended April 2019), although the pace of recovery will likely be measured rather than rapid. Professional Visualization continues to grow, and automotive has resumed growth after de-emphasizing infotainment to focus on autonomous.

In gaming, Nvidia has been impacted by run-off of excess mid-range inventory related to the demise of the crypto-currency boom. Deteriorating economic conditions mainly in China had also impacted consumer demand.

NVidia has also experienced disappointing sales of the new generation of flagship gaming GPUS using ray-tracing technology. We expect this market to perk up in summer 2019 as OEMs begin building product for the upcoming holiday season.

In March, Nvidia announced a deal to acquire Mellanox, which provides chips facilitating advanced data center connectivity. We believe the $6.9 billion all-cash bid is reasonable for a high-quality and profitable company with market leadership in a key, wide-moat niche.

NVidia is acquiring complementary (rather than overlapping) assets, and the combination will strengthen NVidia's position in the AI data center.

We regard any weakness in NVDA as an opportunity to establish or add to positions in this preeminent vehicle for participation in the AI economy. We believe that most technology investors should own NVDA in the age of deep learning, AI, and GPU-driven applications acceleration. We are reiterating our BUY rating to a 12-month target price of $200.

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