NVIDIA
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#NVDA

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Summary

Nvidia will likely crush EPS estimate, but report a slight beat or inline result on revenue.

Analysts have assigned a multiple expansion, but investors have even gone beyond that.

It does not appear likely that Nvidia will report and guide results that will satisfy these multiple expansions.

Nvidia appears priced for a guidance range and I'm not convinced that this is a likely scenario.

Thesis
Nvidia (NVDA) will likely crush EPS estimates again this quarter but report inline revenues. The more important factor with Nvidia is what the earnings imply about the company's valuation. I believe a guidance range is currently priced in, but I'm not convinced that this is a likely occurrence. Nvidia’s short-term risk is skewed to the downside.

Earnings estimates
My estimates are pretty straight forward:

1) Revenue at $1.95 billion. This implies a slight sequential decline of 2%. However, Q/Q this is still an impressive 33% increase.
2) I expect gross margins to be down slightly on a sequential basis with operating expenses essentially flat. Lastly, the tax rate is 17%. This puts the EPS estimate at $0.88 on a diluted basis. This estimate also is on a GAAP basis.

Wall Street is expecting revenues of $1.95 billion and EPS of $0.78. As you can see, this results in an inline revenue or a slight miss. For Nvidia, the revenue estimate is going to be a bigger factor since the company's operating environment is highly competitive. Investors are looking for Nvidia's ability to protect its revenue. EPS can be driven higher by things like buybacks or cost cutting while growing revenues (organically) imply a solid business model and competitive position. In other words, this doesn't bode well for the share price reaction. Although I firmly believe that Nvidia is indeed competitive. Remember that expectations are just that. Just because Wall Street expects more does not mean that the current results imply a declining competitive position. Just because I'd rather eat three steaks than two doesn't mean that two steaks don't fill my belly.

The last time I estimated Nvidia's earnings (FY4Q17), I predicted an overwhelming beat, which happened. The result, however, was not stock price appreciation but rather depreciation. This was a very valuable moment since it thought us what Wall Street is willing to pay.

Valuation
The share price at the time stood at roughly $110 which means the market cap was $63.8 billion at the time. The resulting EV/EBITDA multiple was 27.4. A day later Nvidia reported earnings and the stock tanked to roughly $100 a share before settling at around $105 a share. In other words, markets were only willing to pay a multiple of 20.5 for the company. After Nvidia released it's FY1Q18 the stock gapped up $20 resulting in a valuation of 24.8x EBITDA. So clearly, the market was willing to pay a multiple of roughly 25 right after earnings. My EPS estimate of $0.93 implies a multiple of 29 at current prices. So unless the market has decided that Nvidia deserves an even bigger multiple expansion, this is another bad sign for short-term investors.

Multiple scenarios
Multiple expansion
We can assess whether Mr.. Market is indeed assigning a multiple expansion based on solid fundamentals or if this is just euphoria. Obviously, the latter is a bad sign for those hoping to profit from share price appreciation. Let's take a look at what multiples analysts are assigning. These price targets are post-1Q18 earnings:

Bernstein and RBC Capital seem to be the only ones willing to assign a multiple expansion to Nvidia. Bernstein's price target is $175, implying a multiple of 28.6, while RBC Capital has a price target of $150, implying a multiple of around 28x.

Analysts are becoming increasingly bullish with Canaccotd Genuity assigning a price target of $180 and SunTrust and Citi assigning a target of $177 and $180 respectively. Citi even sees a case for $300.
In other words, yes, Wall Street is assigning a multiple expansion from r
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