It Is What Is, Underweight Nvidia, Do Not Buy

Trending 9 months ago
Graphics Chip Maker Nvidia Reports Quarterly Earnings

Justin Sullivan

Investment Thesis

Nvidia’s YTD show is -49.52%. This large dip has not eradicated the comparative overvaluation of NVDA. I endorsed Nvidia earlier arsenic a buy 23x present astatine Seeking Alpha up to 2018. My older aforesaid present rates NVDA arsenic a sell. I surmised NVDA is inactive flying excessively precocious astatine 91.88x guardant GAAP P/E valuation. Nvidia’s TTM gross CAGR is present only 17.68%. This is simply a large driblet from its 3-year mean 41.8% gross CAGR. My fearless forecast is that NVDA’s negative terms momentum has much downbeat fuel.

My regularisation is that a precocious maturation banal needs to nutrient astatine slightest 20% gross CAGR. Nvidia is nary longer a high-growth banal with its TTM 17.68% gross CAGR. NVDA is underweight astatine 91.88x guardant GAAP P/E. Not adjacent the biggest company successful the world, Apple (AAPL) tin lucifer the ace precocious guardant P/E of Nvidia. Apple’s guardant GAAP P/E valuation is only 21.24x. Nvidia has a guardant Price/Sales valuation of 13.84x. This is again an anomaly due to the fact that Apple lone has 5.17x guardant P/S.

The constituent is that it is simply a marketplace aberration that Nvidia is being valued acold higher than the world’s biggest publically traded institution successful the world. I opine this marketplace anomaly volition yet get corrected.

The illustration beneath says Nvidia’s Data Center’s gross is stagnating. Gaming Segment’s gross dropped large clip successful Q2 and Q3 FY23. We could blasted this connected crypto miners reselling their utilized GPUs. Retail prices of caller GPU products were already getting cheaper successful February. A flood of utilized crypto mining GPUs makes it harder for Nvidia to merchantability caller GPUs.

Nvidia quarterly revenue

If you comparison the screenshot supra to the screenshot below, we are escaped to speculate that the important driblet successful Gaming conception gross straight correlates with the large drop successful quarterly nett income.

Nvidia's accelerated driblet successful nett income makes it a sell

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October 2022’s quarterly nett income of $680 cardinal is simply a monolithic diminution from October 2021’s $2.464 billion.

Negative Price Momentum Could Worsen

I opine Nvidia’s valuation could autumn further. GPU mining for Ethereum died past September. For the near-term I don’t expect the Gaming conception to lend much than $3.5 billion/quarter again to Nvidia’s topline. It was GPU crypto mining that was responsible wherefore the Gaming conception was generating truthful overmuch quarterly sales. Yes, Jon Peddie Research’s Q3 study confirmed that Nvidia has 88% marketplace stock successful discrete GPUs. This is thing to observe about. NVDA is simply a merchantability due to the fact that the Q3 2022 discrete GPU shipments of 14 cardinal is simply a large driblet by Q3 2022’s 24 cardinal units.

Nvidia is the apical discrete GPU vendor, it should endure the astir from this large diminution successful quarterly shipments. It should besides interest Nvidia’s absorption to spot Intel (INTC) having 4% successful Q3 discrete GPU shipments. Intel lone launched its desktop PC Arc GPUs successful China past June.

The worrisome aboriginal script is that Intel has 86% marketplace share successful desktop x86 processors. Intel could usage its contra-revenue maneuver to promote its PC OEM partners to bundle discrete Intel Arc 7 desktop GPUs successful their aboriginal Windows 11/ Windows 12 computers. The Arc 770 is competitive against the gaming benchmark scores of Nvidia’s GeForce 3060 XT Limited Edition.

Intel Arc 770 is bully capable to regenerate Nvidia RTX 3060 and Thiago Trevisan

The technical/emotional indicators are congruent with my bearish outlook for Nvidia. NVDA’s RSI dipped beneath 50 again successful the week earlier Christmas Day. NVDA RSI is present lone 42.51, beneath the neutral level of 50. RSI is saying investors and traders are again bearish connected NVDA. Recent trades besides triggered a short-term bearish awesome called Stochastic Oversold Buried. It means NVDA’s accelerated stochastic has been beneath 20 and has been truthful for the past 5 trading days.

Nvidia’s Average Directional Index oregon ADX inclination is besides bearish. The downward oregon minusDI colored reddish enactment is supra the plusDI. The downward inclination prevails.

ADX indicator is bearish against NVDA

The different crushed wherefore I cannot complaint NVDA arsenic a bargain oregon clasp is its stingy dividend payments. Nvidia is precise profitable. Management could usage immoderate of that $13 billion successful full currency to amended that $0.16 dividend yearly payment. The super-optimism of different NVDA shareholders deserves to beryllium amended rewarded. Nvidia absorption should larn from Apple’s guardant yearly dividend outgo of $0.67. My takeaway is that it is not astute to bash much of that$15 cardinal stock buyback erstwhile NVDA is trading astatine 91.88x GAAP guardant P/E. Increasing the dividend payments would beryllium a amended thought successful my opinion.

super precocious valuation ratios makes NVDA a sell

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It is different letdown that Nvidia surrendered and failed to bargain ARM Holdings. That failed effort outgo Nvidia $1.25 cardinal successful unrecoverable pre-payment to SoftBank Group (OTCPK:SFTBY). That $1.25 cardinal could person been spent alternatively connected expanding dividend payments this year. It could besides person been utilized to pare down Nvidia’s full indebtedness of $11.9 billion.

Why Nvidia Has More Downside Risks

The fabless hardware-centric concern of Nvidia should not person a 91.88x guardant P/E valuation. The nett income borderline of this institution is now lone 20.85%. This is large driblet from its 5-year mean nett borderline of 30.08%. Nvidia’s accustomed manufacturing spouse Taiwan Semiconductor Manufacturing Company oregon TSMC (TSM) has a overmuch higher nett income borderline of 42.51%. TSM’s GAAP guardant P/E is only 11.78x. Nvidia’s aboriginal prosperity is tied to the manufacturing process of TSMC. The governmental hostility betwixt China and Taiwan is besides a acheronian cloud implicit Nvidia.

The rumor past April was that Nvidia made TSMC its sole GPU manufacturing partner. NVDA has go overly reliant connected TSMC. The China menace has forced TSMC to perpetrate $28 cardinal more to physique factories successful Arizona. Unfortunately, the archetypal $12 cardinal TSMC mill being built successful Arizona volition lone commencement 5-nanometer production successful 2024. Nvidia loyalists could lone commune that Samsung (OTCPK:SSNLF) Foundry could hole its factory output issues.

Nvidia is simply a fabless semiconductor steadfast that cannot trust 1 conscionable 1 foundry partner. TSMC has an extended list of foundry customers. I opine Nvidia is not going to get a preferential treatment. TSMC’s biggest customer is Apple.

Leading customers of Taiwan Semiconductor Manufacturing Company (TSMC) successful 2021, based connected gross share

Screenshot of TSMC's biggest customers Premium

The reduced profitability of Nvidia could astir apt worsen. The $3.8 billion/quarter Data Center conception is doing good against Advanced Micro Devices’ (AMD) Instinct MI200 Series of GPU Accelerators. Going forward, the Xilinx Alveo information halfway accelerators and the recently-acquired Pensando infrastructure DPU (Data Processing Unit) could present beryllium bundled with AMD EPYC processors and Instinct information halfway GPUs. Bundling is an effectual way for AMD to disrupt Nvidia’s $3.8 billion/quarter information halfway business.

Intel’s Flex Series information halfway GPUs is different large headwind for Nvidia. Intel presently has a negative gross CAGR. It needs the 25% CAGR of the $17.89 cardinal information halfway accelerator market. Intel tin besides bundle its caller AI-centric scalable 4th-Gen Xeon processors with its Max Series and Flex GPUs, FPGA accelerator cards, Movidius VPUs, and Habana Gaudi 2. Intel’s aggregate hardware products for AI/ML/DL are nicely complemented by the escaped no-code OpenVino framework. Intel’s oneAPI toolkits are its equalizer to Nvidia’s CUDAtoolkits for AI, instrumentality learning, and heavy learning.

The highly precocious valuation ratios of NVDA are not going to past forever. Intel’s Habana Gaudi 2 tin outperform Nvidia’s A100 connected MLFPERF ResNet-50 and MLPERF BERT grooming clip benchmark metrics. The aged Intel Ponte Vecchio (now known arsenic Intel Max GPU series) could also outperform the A100. It volition instrumentality immoderate time, but companies and idiosyncratic developers volition yet larn oneAPI and OpenVino. When this clip comes, they would beryllium utilizing Intel MAX and Flex GPUs alternatively of Nvidia A100 oregon v100.

Probable Upside?

Nvidia could commune hard that different GPU mining-friendly crypto currency becomes a hit. The die-hard loyalists of NVDA could reason that Ethereum is not the extremity of GPU crypto mining. There are inactive astatine least 10 worthy crypto currencies that could beryllium mined utilizing Nvidia’s database of discreet GPUs.

screenshot of astir profitable GPU-friendly crypto coins

Nvidia could walk immoderate of that $13 cardinal currency to marketplace and accelerate the maturation of Vertcoin oregon Monero. Monero’s marketplace headdress is lone $2.68 billion. Nvidia reportedly paid $7 billion to TSMC to unafraid 5-nanometer accumulation for RTX 4080/4090 GPUs. Crypto mining is simply a coagulated tailwind for NVDA. Some of the most profitable GPUS for crypto mining are inactive made by Nvidia. It is an upside tailwind that Intel Arc 7 GPUs are inactive not being utilized for mining.

screenshot of the champion GPUs for crypto mining

The different upside catalysts could travel from Nvidia’s caller acquisitions. The unreality retention absorption of Excelero could assistance Nvidia trust little connected GPU sales. The $59.2 billion planetary unreality retention manufacture is increasing astatine 24.3% CAGR. I recognize wherefore Nvidia purchased interactive avatar tech company, Animatico. It is Nvidia’s diversification determination to articulation the $18.375 cardinal integer signage solutions industry. Bright Computing’s clump computing absorption level complements the heavy learning and instrumentality learning GPUs of Nvidia.

The acquisition of DeepMap could assistance Nvidia’s strategy connected autonomous vehicles. I speculate that Nvidia could commercialized supra $200 again if it comes up with an all-in-one merchandise for the fast-growing (67.8% CAGR) $1.03 cardinal robo taxi industry. Intel and Nvidia are 1 of the collaborators wherefore Baidu (BIDU) present operates its Apollo Go robo taxis successful China.

My Verdict

My accustomed valuation for profitable and still-growing hardware firms similar Nvidia is lone 22x guardant P/E. The January 2024 EPS estimation for Nvidia is $4.37. My just worth terms people for NVDA is truthful lone $96.14. It is good beneath the caller closing terms of NVDA, $152.06.

The diminution successful gaming GPU income is hurting the nett income and maturation CAGR. NVDA is underweight astatine 98x guardant GAAP P/E and 13.84x guardant P/S. Take your losses and run. Please retrieve that my August 19, 2021 merchantability standing was erstwhile Nvidia was inactive trading supra $219. I seldom bash merchantability analyses since 2013. I lone bash bearish essays erstwhile I privation to aftermath up different radical from the mirage of overvalued companies similar Nvidia.

If you are a agelong timer, instrumentality your profits. NVDA is +144.58% since my no. 23, May 2018 bargain recommendation. NVDA is +3,142.22% since my archetypal bargain proposal for NVDA successful April 10, 2014. NVDA has peaked and is connected its mode down. Intel and AMD are semipermanent headwinds for Nvidia’s Data Center segment. Intel and its contra-revenue maneuver are going to spot distant against that 88% marketplace stock of Nvidia successful discrete GPUs.

I’m conscionable a machine technician/graphic designer. You tin disregard my merchantability thesis. You tin travel the consensus bargain rating of Wall Street analysts for NVDA. Wall Street’s mean terms people for NVDA is $203.17.

This nonfiction was written by

Motek Moyen illustration picture

I americium 100% Filipino, with 25% maternal Chinese blood. My inheritance is 20 years successful the creative/advertising industry. I americium a precise atrocious writer, but delight notation to my TipRanks history, oregon bash a manual curation of my investing ideas present astatine Seeking Alpha. You volition cognize that my banal picks are mostly winners. I similar method indicators and the Piotroski F-score is usually my no. 1 origin erstwhile evaluating the concern prime of a stock. My 90s assemblage escapade progressive wasting clip successful B.S. Mathematics, Diploma successful Commercial Advertising, and B.S. Computer Science.I americium a well-trained machine technician, video editor, crippled contented creator, web developer, graphic/UI designer, and societal activist. I volition commencement learning C# successful aboriginal January 2023. If I can't larn doing production-level Blazor apps by extremity of June 2023, I volition conscionable spell backmost to improving my Python skills. I americium excessively aged and sick to beryllium learning a caller programming connection similar C#. I DO NOT gamble/invest connected U.S. stocks. My close lung occupation has fixed maine a atrocious heart. I'm not acceptable capable to bash banal trading.

Disclosure: I/we person nary stock, enactment oregon akin derivative presumption successful immoderate of the companies mentioned, and nary plans to initiate immoderate specified positions wrong the adjacent 72 hours. I wrote this nonfiction myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary concern narration with immoderate institution whose banal is mentioned successful this article.

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