Weakness of Nvidia Still Underestimated by Analysts and Investors

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One of the big bombs that were dropped in the technology sector right into the earnings onslaught came from Nvidia Corp. (NASDAQ: NVDA). With this graphics chipmaker’s shares having been the darling of the markets for 2017 and much of 2018, things have gone from bad to worse, and there may be some additional risks ahead now that the company delivered another stunning blow.

The bombshell news from Nvidia was that it lowered fourth-quarter revenues to roughly $2.2 billion from a prior forecast (which already had been lowered late in 2018) of $2.7 billion. The company previously blamed the impact of lower crypto-related sales, and the new revenue warning blamed weakness in China and more caution from its gaming and data center chip operations.

For this latest warning, the gaming operation’s previous fourth-quarter guidance had embedded a sequential decline due to excess mid-range channel inventory following the crypto-currency boom. The reduction in that inventory and its impact on the business have proceeded largely in line with management’s expectations. Data center revenues also came in short of expectations as a number of deals in the company’s forecast did not close in the last month of the quarter.

Despite many analysts having drastically lowered their Nvidia price targets after the company dropped the bad news, the reality is that Wall Street analysts are sticking with their long-term Buy ratings. Of the 35 firms in which analysts cover Nvidia, there are 23 firms that have Buy ratings. Only two analysts have Sell and Underperform ratings, and there are 10 analysts who have Hold or Neutral ratings.

What is hard to imagine is whether Wall Street is even remotely in touch with reality when it comes to Nvidia’s prospects. The stock already had been cut in half from its 2018 highs, so one has to wonder if all their targets and ratings still have merit. Below are some of the analyst calls and price target changes that were seen in the wake of Nvidia’s disappointing day:

  • Benchmark still has a Buy rating for the long term, but the firm lowered its price target to $190 from $240 after the news.
  • Merrill Lynch maintained its Buy rating and lowered its price objective to $193 from $250, still noting that Nvidia has an unchanged lead in secular growth markets.
  • CFRA (S&P Global) maintained a Hold rating, saying that customers also appear to be holding off on purchases of its new high-end Turing GPUs as they await lower price points and that it finds those delays concerning.
  • Cowen maintained its Outperform but lowered its target to $215 from $265.
  • Evercore ISI Maintained its Outperform rating but lowered its price target to $200 from $275.
  • Mizuho maintained its Buy rating but cut its target price to $200 from $230.
  • Rosenblatt lowered its price target to $170 from $260.

Jensen Huang, Nvidia’s CEO, stuck with the long-term value and upside of operations. His said of the quarter:

Q4 was an extraordinary, unusually turbulent, and disappointing quarter. Looking forward, we are confident in our strategies and growth drivers… The foundation of our business is strong and more evident than ever – the accelerated computing model NVIDIA pioneered is the best path forward to serve the world’s insatiable computing needs. The markets we are creating – gaming, design, HPC, AI and autonomous vehicles – are important, growing and will be very large. We have excellent strategic positions in all of them.

With the price target cuts that had been seen, many analysts are still looking at the long-term upside drivers rather than worrying excessively about the short-term bumps and bruises. With many analysts having lowered earnings estimates out to 2020 and 2021, one has to wonder if the long-term upside drivers should be more muted as well. Again, this stock already had been cut in half ahead of Monday’s big drop.

Shares of Nvidia closed down 13.8% at $138.01 on Friday and the trading volume was more than 60 million shares. The 52-week trading range is $124.46 to $292.76.

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