Nvidia Enjoys Broad-Based Growth in Q2

Wide-moat Nvidia NVDA reported remarkable second-quarter results with revenue ahead of management’s guidance. During the quarter, Nvidia benefited from cryptocurrency mining demand, including crypto mining processor, or CMP, sales of $266 million. We note this is lower than management’s CMP forecast of $400 million. CFO Colette Kress admitted the contribution of crypto to gaming revenue is difficult to quantify, whereas CMP sales are recorded in the OEM segment. In the third quarter, Kress expects minimal CMP sales, which we attribute to weaker crypto prices and the introduction of custom ASICs to mine Ethereum.

Our fair value estimate for Nvidia is $138 per share on a probability-adjusted basis, including a 50% probability that Nvidia closes its pending acquisition of ARM. Our fair value estimate with ARM would be $150, while our standalone fair value estimate for Nvidia is $125 per share if the deal were to be blocked or rejected. While ARM on its own is relatively valuation-neutral for Nvidia, we assume significant long-term revenue synergies for Nvidia’s data center and AI-related segments to justify the increase with ARM in tow.

Second-quarter sales grew 68% year over year to $6.5 billion, with gaming and data center revenue up 85% and 35%, respectively. Although we think gaming GPU sales have also been boosted by crypto demand, management was adamant gaming demand continues to outpace supply. Data center sales benefited from Mellanox and continued adoption of Nvidia’s A100 GPUs at cloud customers including Microsoft, Amazon, and Google. Gross margins during the second quarter grew 70 basis points sequentially to 64.8%, thanks to higher gaming GPU ASPs.

Management expects third-quarter sales to be at a midpoint of $6.8 billion, which implies 44% year-over-year growth (led by the data center segment). Nvidia’s channel inventories are expected to remain below target levels exiting the third quarter, which bodes well for continued growth in the coming quarters.

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