Rubin ushers in a new growth cycle; Bernstein raises NVIDIA's price target to US$400

Overview

This report reviews NVIDIA's FQ2 results, FQ3 guidance, and the Rubin product cycle, and updates its medium- and long-term earnings forecasts and valuation accordingly. Bernstein believes demand is still accelerating and Datacenter growth is far exceeding expectations. Although memory prices are creating short-term gross margin pressure, the impact is manageable. The firm maintains its Outperform rating and raises its price target from US$315 to US$400.

Core views

NVIDIA's FQ2 results exceeded expectations across the board. Revenue was US$96.221 billion, above the market expectation of US$92.3 billion and company guidance of US$91 billion; non-GAAP EPS was US$2.22, above the market expectation of US$2.09. Non-GAAP gross margin was 75.0%, in line with guidance and market expectations; non-GAAP operating margin was 66.5%, slightly above the market expectation of 66.3%; non-GAAP operating expenses were US$8.232 billion, above the market expectation of US$8 billion but below guidance of US$8.3 billion; and the tax rate was 16%, below guidance of 17%. Under another segment reporting classification, Graphics revenue was US$7.9 billion, up 46% year over year, while Compute & Networking revenue was US$88.3 billion, up 114% year over year. Datacenter remained the core growth driver. Revenue from this business reached US$89.023 billion, up approximately 18% quarter over quarter and 117% year over year, exceeding the market expectation of US$85.9 billion. Blackwell and Blackwell Ultra continued to ramp, while networking also delivered strong performance. Hyperscale customer revenue was US$48.7 billion, up approximately 13% quarter over quarter and 102% year over year; AI cloud, industrial, and enterprise customer (ACIE) revenue was US$40.3 billion, up approximately 25% quarter over quarter and 138% year over year. The report also notes that one customer was reclassified from ACIE to Hyperscale during the quarter, with historical data restated accordingly. Edge Computing revenue was US$7.198 billion, up approximately 13% quarter over quarter and approximately 27% year over year, also exceeding the market expectation of approximately US$6.6 billion; this segment includes Gaming, ProVis, Auto, and other businesses. The company is building inventory in advance of new product ramps. Days inventory increased from approximately 114 days in the prior quarter to approximately 118 days, while inventory rose from US$25.797 billion to US$31.575 billion, primarily to support the introduction of products such as Vera Rubin. China's share of revenue recovered from approximately 6% in the previous quarter to approximately 8%, but the report believes this remains low amid current geopolitical headwinds. Although the company has obtained relevant U.S. government approvals for H200, Hopper product revenue from China represented less than 1% of Datacenter revenue during the quarter. FQ3 guidance continued to come in clearly above expectations. The company guided to revenue of US$108 billion, exceeding the market expectation of US$104.6 billion; the report's implied estimate for non-GAAP EPS was approximately US$2.46, above the market expectation of US$2.36. Most of the approximately US$12 billion sequential revenue increase is expected to come from Datacenter, potentially bringing segment revenue to US$100 billion or more, above the market expectation of US$97.7 billion. The guidance excludes China H200 sales, while Rubin is expected to contribute approximately 20% of Datacenter revenue, indicating that the new architecture has already begun generating a meaningful incremental contribution. The more important change comes from the FY28 outlook, corresponding to CY27. The company previously stated that cumulative revenue from CY25 through CY27 would be approximately US$1 trillion, implying Datacenter revenue of nearly US$500 billion in the following year; its latest commentary points to approximately 70% year-over-year growth in FY28 total revenue, equivalent to approximately US$680 billion to US$700 billion, and could increase the following year's Datacenter revenue outlook by nearly US$200 billion. Management said this forecast remains supply constrained; if constraints involving memory, wafers, and other components ease, demand would be sufficient to support 100% year-over-year revenue growth. Bernstein therefore believes both sell-side and even buy-side forecasts have substantial upside potential. Supply assurance capability is another major theme emphasized in the report. NVIDIA's total supply commitments have reached US$279 billion; including cloud service agreements, data center leases, and equity investments, the total reaches US$366 billion. Bernstein believes the company's balance sheet and technological capabilities both constitute competitive barriers, enabling it to secure hundreds of billions of dollars in critical components and invest resources in expanding the ecosystem surrounding its products. The scale of its supply assurance is significantly greater than that of competitors. Short-term pressure primarily stems from memory prices. FQ3 non-GAAP gross margin guidance is 74%, below the market expectation of 74.8%; the company expects gross margin to bottom at approximately 71% to 72% in FQ4, then recover to approximately 72% to 73% in the following year as price increases take effect in FQ1, though still below its previous outlook of approximately 75%. Bernstein believes that, in the current memory cost environment, a decline of only a few percentage points from 75% remains manageable. FQ3 non-GAAP operating expense guidance is US$9 billion, slightly above the market expectation of US$8.9 billion. Full-year operating expense growth is expected to be in the low-50% range, primarily in line with the higher revenue base; tax rate guidance is approximately 17%, below the market expectation of 17.5%. Cash generation and shareholder returns remain substantial. Capital expenditures were US$2.677 billion during the quarter, while free cash flow was US$21.3 billion; the company repurchased US$19.7 billion of shares and paid US$6 billion in dividends, with approximately US$99 billion remaining under its current repurchase authorization. These figures also support the report's assessment that the balance sheet can simultaneously secure supply, expand the ecosystem, and return capital to shareholders. Based on a stronger Rubin cycle and long-term Datacenter demand, Bernstein substantially raised its model forecasts. Its FY2027 revenue forecast increased from US$398.8 billion to US$406.9 billion, FY2028 from US$539.6 billion to US$690.3 billion, and FY2029 from US$623.0 billion to US$954.1 billion. Corresponding non-GAAP EPS forecasts increased from US$9.19 to US$9.20, from US$12.52 to US$15.80, and from US$14.81 to US$22.28, respectively. The firm rolled its valuation period forward from FY28 to the average of FY28 and FY29, applying an approximately 21x P/E multiple, below the previous approximately 25x, to the two-year average non-GAAP EPS of US$19.04. This yields a US$400 price target, and Bernstein maintains its Outperform rating.

Analysis framework

Bernstein first compares actual FQ2 revenue, earnings, and segment performance with company guidance and market consensus expectations, then analyzes Datacenter customer categories, Edge Computing, margins, inventory, and changes in China revenue. The report subsequently rebuilds its revenue and EPS forecasts based on FQ3 guidance, Rubin's contribution, supply constraints, and management's FY28 growth outlook. Finally, it rolls the valuation period forward to average FY28 and FY29 earnings and calculates the price target using a P/E methodology.

Methodology notes

• Valuation MethodologyPE/PEG valuation

  Forward P/E Price Target Method

  The report applies an approximately 21x P/E multiple to average FY28-FY29 non-GAAP EPS of US$19.04, yielding a US$400 price target; the multiple used is below the previous approximately 25x.

• Company Fundamentals and Financial Framework

  Segment Revenue and Earnings Forecast Model

  Starting from growth in Datacenter, Edge Computing, and customer categories, the report incorporates gross margin, operating expense, and tax rate guidance to update annual revenue and non-GAAP EPS forecasts.

• Industry/Sector Analysis FrameworkSupply-demand framework

  AI Computing Demand and Supply Constraint Analysis

  The report combines Rubin demand, memory and wafer constraints, and supply commitments to conclude that the current revenue outlook is supply constrained and that easing those constraints could unlock higher growth.

• Competitive and Strategic FrameworkMoat / competitive advantage

  Dual Barriers from Technology and the Balance Sheet

  Bernstein believes NVIDIA not only possesses technological advantages, but that its balance sheet also enables the company to secure critical components at scale and support ecosystem development, creating an additional competitive barrier.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• NVIDIA Corp (NVDA)

  The ramp of Blackwell and Rubin, accelerating Datacenter demand, and upward revisions to medium- and long-term earnings forecasts constitute the report's primary positive drivers.

  Strengths

  Technological leadership, strong AI computing demand, large-scale supply commitments, a robust balance sheet, and the ability to continuously support development of the product ecosystem.

  Weaknesses

  Revenue realization remains constrained by memory, wafers, and other supply limitations, while recent increases in memory prices will also depress gross margins.

  Comparison

  The report believes NVIDIA's ability to secure hundreds of billions of dollars in critical components far exceeds that of other competitors.

  Risks

  Near-term business volatility, slower growth in key end markets, competitors pressuring market share or pricing, customers shifting to internally developed chips, and technology export regulations could all affect the price target.

Key data

• FQ2 RevenueUS$96.221 billionAbove the market expectation of US$92.3 billion and company guidance of US$91 billion
• FQ2 Non-GAAP EPSUS$2.22Above the market expectation of US$2.09
• Datacenter RevenueUS$89.023 billionUp approximately 18% quarter over quarter and 117% year over year, above the market expectation of US$85.9 billion
• Hyperscale Customer RevenueUS$48.7 billionUp approximately 13% quarter over quarter and 102% year over year
• ACIE Customer RevenueUS$40.3 billionUp approximately 25% quarter over quarter and 138% year over year
• Edge Computing RevenueUS$7.198 billionUp approximately 13% quarter over quarter and approximately 27% year over year, above the market expectation of approximately US$6.6 billion
• FQ2 Non-GAAP Gross Margin75.0%In line with company guidance and market expectations
• FQ3 Revenue GuidanceUS$108 billionAbove the market expectation of US$104.6 billion and excludes China H200 sales
• Expected Rubin ContributionApproximately 20% of FQ3 Datacenter revenueExpected to drive Datacenter revenue to US$100 billion or more
• FY28 Revenue Growth OutlookApproximately 70% year over yearEquivalent to total revenue of approximately US$680 billion to US$700 billion; management said demand would be sufficient to support 100% growth once constraints ease
• Gross Margin Outlook74% in FQ3, approximately 71% to 72% in FQ4, and approximately 72% to 73% in the following yearAffected by memory prices, followed by an expected partial recovery due to price increases
• Supply-Related CommitmentsUS$279 billionUS$366 billion including cloud service agreements, data center leases, and equity investments
• FY2028 Revenue ForecastUS$690.3 billionPrevious forecast: US$539.6 billion
• FY2029 Revenue ForecastUS$954.1 billionPrevious forecast: US$623.0 billion
• FY2028 Non-GAAP EPS ForecastUS$15.80Previous forecast: US$12.52
• FY2029 Non-GAAP EPS ForecastUS$22.28Previous forecast: US$14.81
• Quarterly Free Cash FlowUS$21.3 billionCapital expenditures were US$2.677 billion during the same period
• Quarterly Shareholder ReturnsUS$19.7 billion in repurchases and US$6 billion in dividendsApproximately US$99 billion remains under the repurchase authorization

Impact & implications

The report believes this quarter not only validated Blackwell demand but also indicated that Rubin could initiate one of the largest product cycles in NVIDIA's history. The significant upward revision to the FY28 revenue outlook implies that market earnings forecasts may continue to rise, while supply assurance capabilities should help convert strong demand into deliveries. Memory costs will depress near-term gross margins, but Bernstein believes the decline will be limited and that price increases can drive a partial recovery, leaving its positive view unchanged.

Risks

• Near-term business trends may experience significant volatility.
• If revenue growth in key end markets falls below expectations, it could depress the valuation multiple and weaken operating expense leverage.
• Competitors may pressure NVIDIA's market share or product pricing.
• Customers may gradually shift toward internally developed chips.
• Technology export-related regulations may restrict sales and growth.

What to watch

• Monitor whether the Rubin ramp can reach the expected approximately 20% share of FQ3 Datacenter revenue.
• Monitor whether Datacenter revenue can reach or exceed US$100 billion, as well as progress in easing supply constraints involving memory, wafers, and other components.
• Monitor whether gross margin declines to approximately 71% to 72% in FQ4 as guided and then recovers to approximately 72% to 73% in the following year.
• Monitor progress in China H200 sales; FQ3 guidance currently excludes the related revenue.