Visual computing company NVIDIA Corporation (NVDA - Get Rating) operates through Graphics and Compute & Networking segments. It offers GeForce GPUs for gaming and PCs, as well as automotive platforms for infotainment systems. The company’s expanding data center business and increasing adoption of its NVIDIA-powered laptops and computer platforms have helped the stock surge 102% over the past year. Its shares soared 31.7% over the past month, after NVDA confirmed collaboration with Arm Limited, a British chip technology company, to combine and create a new class of Arm-based PCs with NVIDIA RTX GPUs.

However, the company’s $40 billion acquisition deal of Arm is facing European and US regulatory scrutiny currently. And the deal may not be able to meet a March 2022 deadline for closing. Moreover, the ongoing supply constraints of its GPUs amid the global chip shortage could be a hindrance for the stock. While the company continues to strengthen its AI offerings, its near-term growth prospects look uncertain.

Here is what we think could influence NVDA’s performance in the near term:

Merger With Arm Faces Roadblock

Last September, NVDA entered into a definitive agreement to acquire Arm Limited from SoftBank for a transaction valued at $40 billion, to develop a leading computing company for the age of artificial intelligence. However, in April, the U.K. government ordered the country’s antitrust agency to investigate the merger’s national-security implications and deliver a report by July 30. In February, the US Federal Trade Commission started n-depth scrutiny into the acquisition plan. These regulatory hurdles could make investors nervous about the deal’s benefits and lead to the stock witnessing a pullback soon.

Favorable Analyst Estimates

A $6.48 billion consensus revenue estimate for the next quarter, ending September 2021, indicates a 37.1% improvement year-over-year. The company’s revenue is expected to increase 10.3% in 2021 and 11.6% next year.

Analysts expect NVDA’s EPS to decline 88.5% year-over-year in the current quarter ending July 2021 and 9.1% in fiscal 2022. Also, the company’s EPS is expected to increase at a rate of 26.8% per annum over the next five years.

Mixed Financials

NVDA’s revenue increased 84% year-over-year to $5.66 billion in the fiscal first quarter ended May 2, 2021. Its net income increased 109% from the year-ago value to $1.91 billion. However, the company’s gross margin declined 100 basis points from the prior-year quarter to 64.1%. Moreover, its operating expenses rose 63% from the year-ago value to $1.67 billion. NVDA reported an interest income of $6 million, compared to $31 million in the prior-year period.

Consensus Price Target Indicates Potential Downside

Of the 37 Wall Street analysts that rated NVDA, 25 rated it Buy while six rated it Hold. Analysts expect the stock to hit $715.34 in the near term, indicating a 4% potential decline from its last closing price of $746.29. The price targets range from a low of $400 to a high of $800.

POWR Ratings Reflect Uncertainty

NVDA has an overall rating of C, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. NVDA has a D grade for Value. The company’s forward non-GAAP P/E ratio of 44.89, which is 70.1% higher than the industry average of 26.39, justifies the grade. It also has a C grade for Stability given its 5-year monthly beta of 1.37.

However, the company has a Sentiment grade of A, reflective of analysts’ expectations regarding its earnings and revenue growth.

In addition to the grades we’ve highlighted, one can check out additional NVDA ratings for Quality, Growth, and Momentum here. NVDA is ranked #55 of 98 stocks in the B-rated Semiconductor & Wireless Chip industry.

Click here to view the top-rated stocks in the Semiconductor & Wireless Chip industry.

Bottom Line

In the last reported quarter, strong demand for NVDA’s gaming and data center services has helped the company achieve record revenues. While the company’s collaboration with Arm to support the development of AI and scientific applications has helped the stock gain more than 30% over the past month, the ongoing regulatory concerns regarding the merger can be a major hurdle for the company. Moreover, it could take several months for its chip supply to catch up with the skyrocketing demand. So, we think investors should wait until NVDA fares better in navigating the challenges.

NVDA shares were trading at $771.41 per share on Friday afternoon, up $25.12 (+3.37%). Year-to-date, NVDA has gained 47.81%, versus a 11.92% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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