Nvidia's stock picks up a new bull who says there's 'still room on this train'

By Emily Bary

A William Blair analyst cheers Nvidia's moat and margins - while also weighing in positively on Broadcom and Arm shares

Nearly all Wall Street analysts are bullish on Nvidia Corp.'s stock. Now, another has joined the pack.

That's William Blair's Sebastien Naji, who initiated coverage of Nvidia shares (NVDA) with an outperform rating on Wednesday. Before his call, 59 of 63 covering analysts tracked by FactSet rated Nvidia shares the equivalent of buy; Naji's initiation makes that 60 out of 64.

He titled his note to clients: "Still Room on This Train." Nvidia shares are up 133% so far this year and ahead nearly 700% since the start of 2023.

While Nvidia is best known for its graphics processing units that have become essential in the artificial-intelligence era, Naji noted that the company's advantage stretches far beyond that hardware.

Read: Nvidia's stock has room to run - but analysts see more upside for 6 other chip makers

"Nvidia's technical differentiation extends beyond building state-of-the-art processors to include fully integrated systems," he wrote. "Specifically, Nvidia has built a deep software ecosystem ... and developed core competencies in networking (through its acquisitions of Mellanox and Cumulus), systems engineering and supply chain management."

These moves open up Nvidia's total addressable market enormously, he wrote. For instance, while the traditional GPU business has a TAM of about $100 million, the TAM for the larger semiconductor market is about eight times the size, and the TAM for cloud services is about 16 times the size.

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The company's varied offerings give it a good moat, according to Naji. "Companies like Nvidia do not view them-selves as chip providers but rather as builders of entire computers, where the integration of chips, storage, networking and software plays a key role in driving performance improvements."

Naji thinks that Nvidia has a one-to-two-year lead on rivals when it comes to the performance of its AI graphics processing units. That's one factor behind Nvidia's ability to boost gross margins to about 74%, above a prior historical range of roughly 50% to 60%. The company has "structurally higher margins," he wrote, also owing to the "system-level approach" combining many elements of the technological stack.

He sees the company's margins as "sustainable for several years as Nvidia maintains its competitive moat across both hardware (e.g., new Rubin chips already expected next year) and software." Still, he acknowledged that the company has very strong pricing power now that could lessen somewhat as competitors step up their offerings.

Naji also chimed in with new outperform calls on shares of Broadcom Inc. (AVGO) and Arm Holdings PLC (ARM).

For Broadcom, he flagged the continued impact of the company's VMware acquisition, which pushed it deeper into software.

"While the acquisition has had a disruptive impact on VMware customers who are seeing their license costs skyrocket, the mission-criticality of VMware's software and the lack of easy alternatives have led to a majority of customers renewing at higher prices," he wrote. "While we expect this acquisition over the longer term will push away many of VMware's smallest customers, our sense is that Broadcom's strategy to focus on the highest-[return on investment] customers is working as planned, adding a massive, sticky, recurring revenue base."

Naji highlighted that Broadcom now derives almost 40% of its sales from software.

As for Arm, Naji likes the chip designer's "best-in-class financials."

"Arm's royalty/licensing revenue model drives best-in-class profitability," with research and development accounting for the company's biggest expense at about 35% of last fiscal year's sales. "With expanding royalty rates helping drive better operating leverage ... we see room for sustained [earnings-per-share] and free cash flow growth."

More from MarketWatch: Why Arm's stock just nabbed a new bullish call, even after doubling this year

-Emily Bary

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09-18-24 0907ET

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