Nvidia at heart of data centre revolution, says BNP Paribas; sees 36% upside

Nvidia is at the heart of the data centre revolution and is well positioned to benefit from megatrends in generative AI and autonomous cars, according to Karl Ackerman of BNP Paribas Securities.

Beyond the deployment of generative AI and large language models, Nvidia is benefiting from the shift from general-purpose computing to accelerated computing, Ackerman said. The company offers all the building blocks, including GPUs, CPUs, DPUs and fabric, he added.

BNP Paribas sees 36% upside


BNP Paribas has an outperform rating on Nvidia with a target price of $285, implying 36% upside from the previous Nasdaq close of $209.66. The brokerage values the stock at around 25 times FY28 non-GAAP earnings, at a discount to its three-year EPS CAGR of 40%.

The assessment follows Nvidia's second-quarter results, which reported revenue of $96.22 billion and earnings per share of $2.22. The figures were 4% and 6% above consensus estimates of $92.38 billion and $2.09, respectively.

Data Center sales rose 18% quarter-on-quarter and 117% year-on-year to $89 billion, comprising $48.7 billion from Hyperscale and $40.3 billion from ACIE.

Ackerman said strong fiscal second-quarter growth was primarily driven by Blackwell systems, while Nvidia's next-generation Vera Rubin platform began production shipments earlier this month.

Nvidia said Networking revenue grew 18% quarter-on-quarter, driven by Spectrum-X, which grew 2.6 times year-on-year. Edge Computing revenue increased 13% quarter-on-quarter to $7.2 billion.

The company reported gross margin of 75%, in line with guidance and expectations. Operating expenses of $8.2 billion were slightly below guidance of $8.3 billion, driving an operating margin of 66.5%.

Nvidia guides for $108 billion revenue

For the third quarter, Nvidia guided for revenue of $108 billion, 3% above consensus of $105.1 billion. The company expects Vera Rubin to account for approximately 20% of Data Center revenue in the quarter.

Nvidia expects gross margin to contract 100 basis points quarter-on-quarter to 74%, 80 basis points below consensus, due to higher component prices. The company expects gross margin to bottom in the fourth quarter at 71-72% before returning to 72-73% in FY28, supported by price increases.

On operating expenses, Nvidia guided for $9 billion in the third quarter, in line with consensus, implying an operating margin of 65.7%, 78 basis points below consensus.

Based on a guided tax rate of 16-18%, BNP Paribas estimates implied third-quarter non-GAAP EPS, excluding stock-based compensation, at $2.44, 3% above consensus of $2.36.

Overall, the brokerage views Nvidia's results as positive for the broader AI semiconductor and networking hardware ecosystem.

"On top of the Generative AI and Large Natural Language model deployment, the company is benefiting from the shift from General Purpose Computing to Accelerated Computing and offers all the building blocks: GPU, CPU, DPU, Fabric. The company is at the heart of the Datacenter revolution," the brokerage said in its report.

Supply commitments, networking growth support outlook

BNP Paribas said the results represented a "beat and raise", including the company's first full-year n+1 outlook for FY28, which calls for 70% year-on-year growth constrained by supply-chain readiness.

The brokerage highlighted several factors supporting its outlook. Nvidia increased its supply commitments by $160 billion to $279 billion in the second quarter, most of which is for HBM supply, underscoring Nvidia's confidence in a $2 trillion cloud industry demand funnel, according to the brokerage.

Server CPUs are expected to more than double year-on-year in FY28, while the Vera Rubin platform is expected to achieve 20% of revenue in the third quarter and represent a 60% increase in content per gigawatt compared with Blackwell.

Networking growth remains strong, with Spectrum-X up 260% year-on-year. The brokerage also said financing structures offer potential revenue-sharing agreements and recurring revenue streams incremental to hardware purchases.

BNP Paribas, however, cautioned that gross margins may remain structurally muted due to persistent component price increases and growing competition from GPUs and third-party ASICs.

Land, power and shell capacity are also becoming constraints for the AI supply chain. The brokerage noted that nominal sales growth for the third quarter is low entering a new product ramp.

Nvidia's financing initiatives could also expose the company to counterparty credit risk associated with supporting underlying infrastructure or absorbing losses on guarantees.

Brokerage outlines potential risks

According to BNP Paribas, upside risks include stronger capital expenditure by hyperscalers and enterprises on AI factories, as well as more complex AI models driving higher AI compute intensity.

Downside risks include increased competition from custom chips and competitors, saturation of generative AI due to a lack of return on investment from enterprise customers, and the possibility that consumer AI fails to emerge as a growth driver.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)