Nvidia (NVDA - Get Report) has more game than BMO Capital Markets previously thought, analyst Ambrish Srivastava wrote in a Sunday note as he raised his price target for the chipmaker from $135 to $200 per share.
Share of Nvidia were down 0.1% at $215.88 on Monday morning. The stock gained more than 5% Friday after reporting strong third-quarter results, including demand from the Nintendo's (NTDOY) Switch gaming device, sales for cryptocurrency mining, progress in data centers and a bright outlook for artificial intelligence. Srivastava upgraded the stock from underperform to market perform. Shares are up more than 100% year to date.
"Our negative stance to date was based largely on our view that the gaming business would see a marked deceleration in [calendar year 2017 versus 2016]," he wrote. "However, the diversity in the business with wins at Nintendo, and help from the cryptocurrency market, has enabled the business to sustain at a higher level than what we were modeling."
Sales of graphics processing units for gaming machines make up close to 60% of Nvidia's sales, and increased 25% to $1.56 billion in the third quarter.
Nvidia founder and CEO Jensen Huang described the company's success among games during Thursday's earnings call. "People want to win and having better gear helps," he said. New titles such as Activision Blizzard's (ATVI - Get Report) Destiny 23, PlayerUnknown's Battlegrounds, Call of Duty WWII and Star Wars: Battlefront II help drive demand for faster machines, the company said.
Revenues from data centers, which account for about 19% of Nvidia's business, grew 109% to just over $500 million in the quarter -- hitting a $2 billion yearly rate of sales and helping to change Srivastava's thinking. "This has made us question whether the market is indeed far greater than what we had expected previously," he rote.
Srivastava's new price target comes to 45 times BMO's projected earnings per share for Nvidia in calendar year 2018, a significant bump from his prior target multiple of 30 times earnings per share. Other chipmakers in Nvidia's peer group trade around 16 times to 17 times projected EPS.
Despite the stock's big run-up this year, Srivastava suggested that the market for artificial intelligence justifies Nvidia's higher multiple. "[G]iven what is now perceived as a blue-sky opportunity that the company has in front of itself in AI, we see investors continuing to value the stock at a high premium to the group," he said.
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