NVIDIA Corporation (NASDAQ:NVDA) is a powerful technology firm specializing in gaming and data center solutions. We earlier released a scathing essay on Nvidia on SA, highlighting their excessive exposure to cryptocurrency mining. However, following last week’s F2Q23 results, we remain pessimistic on NVDA and believe the stock has further to go from its present levels, owing to decreasing demand for data center products and a glut of GPUs in secondary markets and channels.
Our pessimistic thesis is predicated on the expectation that the stock market will continue to fall as gaming demand stays sluggish and data center demand slows significantly. We believe the stock’s 46% year-to-date decrease is attributable to its exposure to GPU-related sales and Ethereum’s transition to Proof of Stake (PoS), which no longer requires GPUs to mine cryptocurrency. We expect that sluggish GPU demand will persist owing to channel inventories and the completion of Ethereum’s PoS shift in September. However, we anticipate additional losses as data center demand normalizes. While we are optimistic about the company’s long-term potential, we feel there is still more downside ahead and advise investors to sell the shares at present prices. We will return to the NVDA tale as we look for good inflection points in its company.
Another shoe to drop; Datacenter slowdown presents more downside.
We do not anticipate NVDA’s data center sector will be able to compensate for the gaming drop because data center demand is expected to weaken in the coming quarters. We feel that the decline in consumer expenditure is catching up with data centers. Sluggish demand for smartphones and PCs has hampered cloud services (whether cloud-based services, entertainment, or office-based). We also feel that data center supply chain concerns are causing a Toilet Paper Effect. Due to supply constraints, businesses are ordering twice as much as they will require shortly. As a result, we anticipate the next major hurdle for NVDA will be a downturn in data center demand.
In last week’s results call, CEO Jensen Huang blamed decreased sales to “China hyperscale clients” for the lower-than-expected 1% sequential increase in data centers. We anticipate a similar situation with hyperscale customers in other regions in the future. We feel the impending data center slowdown was overstated on the call. It will be another shoe to drop in the coming months.
AMD is becoming a serious competitor on multiple fronts
While the data center and gaming businesses have strong long-term potential, we believe macroeconomic headwinds are beginning to bite in the near term. Following AMD’s acquisition of ATI, the rivalry between Nvidia and Advanced Micro Devices (AMD) has intensified. AMD places the CPU and parallel graphics processing engines on the same chip. Sony’s PS4 PlayStation, Nintendo’s Wii U, and Microsoft’s Xbox One are now powered by AMD CPUs. Furthermore, AMD’s acquisition of Xilinx poses a significant challenge to Nvidia’s dominance in the data center semiconductor industry. AlveoAI accelerator cards from Xilinx are utilized in high-performance computing applications such as real-time machine learning, data analytics, video processing, and genomics.
With AMD performing well on both the product and sales fronts, we believe NVDA’s business is in jeopardy. On the other hand, Nvidia’s performance must be flawless because it trades at a greater multiple than AMD.
Where are we headed now?
We anticipate a slowdown in enterprise data center and hyper-scale cloud customer demand over the next two to three quarters. Many software firms, including Splunk (SPLK), Microsoft (MSFT), Workday (WDAY), and ServiceNow (NOW), have already reported increased transaction scrutiny and longer deal processes. We do not believe any software/hardware provider is immune to a drop in demand as businesses become more cautious in their IT purchases.
Despite having one of the greatest portfolios in the business, we anticipate a decrease in demand for Nvidia’s data center products in the coming months. Furthermore, the pandemic increased PC shipments from 260-270 million units to over 330 million, as many employees began working from home. As the epidemic subsides, we estimate PC unit shipments to return to their historical average of roughly 270 million units per year, putting pressure on graphics card shipments.
We expect Nvidia to cut forecasts again next quarter, putting pressure on the stock. As a result, we advise investors to wait for the dust to settle for a better entry price before purchasing Nvidia stock.
Valuation
Despite lower expectations for the October quarter, NVDA stock remains pricey. NVDA is trading at 35 times C2023 EPS of $4.51, compared to the peer group average of 15.9 times. In addition, the stock is trading at 12.9x EV/C2023 sales versus the group average of 4.4x. We feel that the expected data center downturn has not yet been factored into the stock. We expect the stock to fall much more as demand headwinds continue to materialize, and we advise investors to sell now.
Word on Wall Street
On NVDA, Wall Street’s sell-side remains extremely positive. 37 of the 46 analysts rate the stock as a buy, while the rest rate it as a hold. We feel that sell-side ratings are overly optimistic, assuming that NVDA’s vulnerability is priced for additional deterioration. NVDA is presently trading at $158, and we anticipate additional declines. We won’t be shocked if the stock reaches $125 in the coming weeks/months. The median sell-side price objective is $215, with a mean of $216 and a potential upside of 36-37%.
What to do with the stock
We see an additional downside for NVDA as data center and gaming malaise materializes. As Ethereum shifts to PoS and channels inventory piles up, NVDA’s main industry, gaming, risks depressed sales. We do not expect GPU demand to recover much in the next two quarters. However, our most recent concern for NVDA is a data center demand slowdown caused by double ordering. We predict the stock to fall from its present levels and highly advise selling.
Featured Image – Megapixl © Kmarypi6i
