Analysts Turn Cautious on Nvidia Stock amid Slowing Economy

With a YTD loss of almost 54%, Nvidia is among the worst-performing chip stocks. The stock has created significant wealth for investors over the last decade but Wall Street analysts are getting apprehensive about its short-term outlook.

Nvidia reported its fiscal second quarter 2022 earnings last month where it posted revenues of $6.7 billion. While the revenues were up 3% YoY and in line with analysts’ estimates, Nvidia had lowered its revenue guidance from $8.1 billion to $6.7 billion just days ahead of the earnings release.

The company’s EPS, however,  trailed analysts’ estimates in the quarter. Jensen Huang, Nvidia’s founder, and CEO said in his prepared remarks, “We are navigating our supply chain transitions in a challenging macro environment and we will get through this.”

August was a tough month for Nvidia investors

August was a tough month for Nvidia investors. The stock fell after it lowered its guidance for the fiscal second quarter. It again crashed after the earnings release as it guided for revenues of $5.9 billion in the fiscal third quarter, which was way below what analysts were expecting.

In its SEC filings later in August, Nvidia said that the US restricted some chip sales to China which it believes would be a $400 million hit to its revenues. It however added that it accounted for this hit while providing its revenue projections. Nonetheless, the stock plunged after the report on fears of a US-China tech war.

Gaming slowdown

In its fiscal second quarter, Nvidia reported gaming revenues of $2.04 billion, which was 33% below the corresponding quarter last year. Gaming has a particularly weak spot for NVDA and to make this worse, the business is facing tough YoY comps.

Nvidia’s CFO Colette Kress said, “These decreases were primarily attributable to lower sell-in of Gaming products, reflecting reduced channel partner sales due to macroeconomic headwinds. In addition to reducing sell-in, we implemented pricing programs with channel partners to address challenging market conditions that are expected to persist into the third quarter.”

Nvidia is betting on the automotive business

Nvidia’s Data Center business reported revenues of $3.81 billion in the quarter which were 61% higher on a yearly basis. On a sequential basis, the growth was only 1%. During the quarter, its Automotive revenues increased 45% YoY to $220 million. In his prepared remarks, Huang said, “Automotive is becoming a tech industry and is on track to be our next billion-dollar business.”

The chip industry is facing a slowdown

The chip industry is witnessing a severe slowdown. Over the last month, almost all the chipmakers have fallen after reporting their earnings. The industry is witnessing a growth slowdown. Broadcom stock however rose after its earnings last week. Unlike companies like Intel and Nvidia, Broadcom does not have much exposure to consumer industries and has therefore been able to dodge the slump in PC sales.

If the growth slowdown wasn’t enough, the US has barred Nvidia from exporting some chips to China. While the revenue hit is not much and was baked in Nvidia’s guidance, it has raised fears of an escalation in the US-China tech war. Trade-related tensions between the two countries reached their epitome in 2018 under President Donald Trump who imposed massive tariffs on Chinese goods.

While the overall US-China relations haven’t improved, and if anything, the political relations have nosedived following Nancy Pelosi’s Taiwan visit, the business relations have improved somewhat. President Joe Biden was even contemplating waiving some of the China tariffs to tame spiraling inflation at home.

Cathie Wood bought more Nvidia shares

Meanwhile, Cathie Wood of ARK Invest, who had sold some Nvidia shares before the earnings release last month, has purchased more shares after the recent crash. Wood, however, trimmed her holdings in Tesla. While she is among the most prominent Tesla bulls, Wood often sells Tesla shares. At times, the sale is meant to rebalance Tesla’s weight in the portfolio while at other times, she sells Tesla to raise cash for buying other stocks.

Wall Street analysts turn bearish on Nvidia

Amid the slowing growth and US restrictions on chip sales to China, some analysts have turned bearish on Nvidia. Bernstein analyst Stacy Rasgon lowered her target price on NVDA from $210 to $180 after restrictions on chip sales to China.

She said, “It feels prudent to take the impacted China revenues out of our NVIDIA numbers” Rasgon added, “This may turn out to be overly punitive as we can see the potential to garner some licenses etc (while we get the effort to limit China military risk presumably the US does not want to overly burden our own companies unnecessarily either).”

Rasgon believes that Chinese customers might look at alternative suppliers in China amid the growing regulatory headwinds. Daiwa went a step ahead and downgraded Nvidia stock from overweight to neutral. Daiwa analyst Louis Miscioscia is apprehensive of Nvidia’s valuations and slashed the target price from $215 to $133.

Valuation concerns

He said, “In moving to a 3/Neutral rating, there are now just too many uncertainties, especially given high valuation, of how much will the USG restrictions impact business, what is the normalized Gaming growth rate, and will the weak economy hurt DC sales.” Miscioscia added, “We suggest investors move to the side while valuation resets, and long-term growth visibility emerges.”

He believes that Nvidia’s valuation multiples are too high especially given the current macro environment. To be sure, Nvidia stock is trading at a premium to other chip stocks. However, it has always traded at a premium considering its strong revenue growth. In contrast, while chip stocks like Intel trade at depressed valuations, they have failed to create investor wealth over the last decade.