Case Study on NVIDIA (NVDA) with Nobias technology
Summary
On a year-to-date basis, NVDA is down by 54.69%, falling by 15.75% last week alone.
The most recent leg of the sell-off was inspired by semiconductor sales restrictions between the U.S. and China.
Yet, even with such strong negative momentum in mind, the credible analysts see upside potential of approximately 50%.
After establishing itself as a top Nasdaq performer in 2020 and 2021, Nvidia’s (NVDA) shares have suffered throughout 2022. On a year-to-date basis, NVDA is down by 54.69%. The stock is down 25.66% during the past month. NVDA shares fell 15.75% last week alone. And yet, even with such strong negative momentum in mind, the credible analysts that the Nobias algorithm follows continue to express very bullish opinions with regard to NVDA stock.
Howard Smith, a Nobias 4-star rated author, touched upon NVDA’s most recent leg lower in an article published on September 2, 2022. Smith said, “Shares hit a 52-week low on Thursday when the company reported it has the potential to lose up to $400 million in data center revenue in the current quarter after the U.S. government imposed a new license requirement that restricts some semiconductor chips from being sold in China.”
Smith continues, “Panic-selling can provide a good opportunity for long-term investors to buy shares at lower prices. But Nvidia's business was already in transition prior to these new impacts. Its recently reported quarterly results showed a 19% drop in revenue compared to the previous quarter. Year-over-year revenue still grew 3%, but investors had bid Nvidia shares up to a valuation that priced in much stronger annual growth.”
NVDA Sep 2022
During NVDA’s recent quarterly results, the company began its quarterly “Highlights” segment by showing its recent Data Center success. The company’s press release stated, “Second-quarter revenue was $3.81 billion, up 61% from a year ago and up 1% from the previous quarter.”
And, as Smith noted, this is why the China sanctions news was so significant to investors. He said, “The news this week that this segment could take a hit from the new government restrictions was particularly troublesome for some shareholders.”
Smith ended his article with a fairly neutral conclusion, stating, “It may take some time for the stock to settle from this news, and some questions remain about Nvidia's growth path and valuation. But for some investors, this week's drop could be a good time to get shares of a leader in a growing sector.”
Nobias 4-star rated author, Shanthi Rexaline, also covered the semiconductor restrictions that the U.S. government put into place in an article that was published at Benzinga on 9/02/2022. “The affected chips,” Rexaline said, are the “H100 and A100 from Nvidia and Advanced Micro Devices, Inc.”
Rexaline said, “TFI Securities analyst Ming-Chi Kuo said the government’s move will ensure that the U.S. maintains its leadership position in the field of AI.” She continued, “However, the analyst noted that China was the frontrunner in terms of AI patent filings.”
Rexaline notes that there are national security implications to this type of move. She stated, “According to Kuo, AI development is one of the core competitiveness of a country, and it has applications in aerospace and the military, among other things.”
But, even though this situation creates a potential long-term growth headwind for semiconductor stocks like NVDA, Rexaline highlighted how these sanctions may bolster near-term quarterly results. She wrote, “Kuo said Chinese clients may directly or indirectly place “rush orders” to boost inventory in order to lower the risk associated with the possible expansion of sales restrictions by the U.S. government.”
Cavenagh Research, a Nobias 4-star rated author, published a bearish report on NVDA at Seeking Alpha after these restriction headlines broke. Regarding the impacts of the sales restrictions the author wrote, “Nvidia has estimated the impact of the export restriction at $400 million in potential sales for its third fiscal quarter. Accordingly, the impact could be expanded to about $1.6 billion annually. If we apply Nvidia's 26% net income margin, and further apply the stock's current x81 one-ear forward P/E multiple, the impact on valuation loss could be estimated at about $33.7 billion of equity value.”
Then Cavenagh Research touched upon NVDA’s valuation metrics, stating, “Investors should consider that Nvidia's one-year forward GAAP P/E of 81x implies a 270% premium to the U.S. technology sector. Nvidia's P/B of 15.8x and P/S of 13.9x imply a 290% and 395% premium respectively.”
They continued, “In my opinion, Nvidia stock has for a long time been overhyped and overvalued. And although NVDA stock is down approximately 60% from all time highs, I argue there is still some excess valuation premium that need[sic] to be corrected in order for investors to enjoy an attractive risk/reward.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
The author concluded their report, “No doubt, Nvidia is a great business. But the company's stock is dangerous.” Highlighting their “sell” rating, Cavenagh Research said, “Personally, I would not buy Nvidia at a valuation above 30x EV/EBIT and/or 10x EV/Sales, which are still very proud multiples. Accordingly, I see 20 - 30 percent more downside before the risk/reward for investors becomes justified (but arguably still not attractive given the regulatory risk and slowing business cycle).”
Rexaline also published a report on 9/3/2022 which showed that not all investors are quite so bearish. She noted that Ark Invest remains bullish, stating, “Ark Stands By Nvidia: Undeterred by the weakness, Cathie Wood continued to bulk up on the stock on Thursday and Friday. The fund manager’s Ark Invest bought 21,026 shares of Nvidia, valued at over $2.9 million, on Friday, a daily trade disclosure showed.”
While the majority of credible authors that the Nobias algorithm tracks are bearish on NVDA shares, the majority of Wall Street analysts that cover the stock remain bullish. 57% of recent articles published on the stock by credible authors have expressed a “Bearish” sentiment.
However, 11 out of the 18 credible Wall Street analysts that Nobias tracks who offer opinions on Nvidia believes that shares are headed higher. Right now, the average price target that credible Wall Street analysts are applying to NVDA shares is $197 Relative to NVDA’s closing price on Friday of $136.47 this average price target implies upside potential of approximately 50%.
Disclosure: Of the stocks discussed in this article, Nicholas Ward is long NVDA. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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