Signs The Desktop GPU Market Is Oversaturated Keep Analyst Underweight On Nvidia

Pacific Crest Securities, a unit of KeyBanc Capital Markets, said it remains Underweight on NVIDIA Corporation (NASDAQ: NVDA) due to signs of desktop GPU market saturation, lower margins from incremental Nintendo Co., Ltd (ADR) (OTC: NTDOY) Switch revenue and a possible sales pause in its data center business this summer.

Q1 Expectations

Analysts Michael McConnell and James Wang said they expect in-line first-quarter results, helped by late deals to notebook OEMs. The analysts are of the view that weaker-than-expected GPU sales would be offset by the sequential growth in the data center segment.

Additionally, late quarter-end GeForce 10-series GPU deals to notebook OEMs could carry unfavorable margin and/or inventory implications, the analysts said.

No Improvement In Desktop And Gaming Outlook

Pacific Crest noted that sales remained weak at desktop graphics card manufacturers, exiting April, with GPU orders unlikely to meaningfully resume until July. Specifically, the firm looks for a 10–15-percent sequential decline in desktop graphics card sales in the second quarter compared to its late-March forecast for flat to 10 percent sequential drop.

In-Line To Below-Consensus Guidance Likely For Q2

The firm expects Nvidia's second-quarter guidance to be in-line to below consensus premised on the following reasons:

• Calendar year second quarter forecasts at first-tier graphics card manufacturers for a 10–15 percent sequential sales decline vs. fiscal second-quarter consensus estimates for 1 percent quarter-over-quarter gaming sales growth.
• New competition from Advanced Micro Devices, Inc. (NASDAQ: AMD)'s Vega GPUs .
• A lack of new high-end GeForce GPU product launches.
• Unfavorable seasonality and back-end loaded sales linearity in the fiscal-year second quarter.
• A possible sales pause in the data center business segment.

Downside In Nvidia To $90

Pacific Crest reiterated its Underweight rating and a $90 price target for the shares of Nvidia.

The firm reasoned that the stock's premium multiple necessitates upward revision to consensus estimates, a scenario it views as unlikely, given its investment thesis and findings.

"We view downside in NVDA to $90, or 30x our EPS estimate of $3.00 for F2019," the firm said.

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