Last month, I made a point of underscoring how a couple of new ventures for Nvidia Corporation (NASDAQ:NVDA) could end up making NVDA stock a worthy name again. Namely, the use of graphics processors rather computer processors in artificial intelligence applications was promising, and the advent of autonomous vehicles could represent a key growth market for Nvidia’s technology.
![Nvidia Corporation (NVDA) Stock Is in Analysts' Crosshairs](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
There’s a flipside to that cautiously optimistic thesis, however. That is, as big as self-driving cars and AI could be for Nvidia, in the near-term, NVDA stock is going to be driven by its core businesses … GPUs for desktops, graphics processing technologies for laptops, and processors for mobile devices. If it falters any on those fronts, last year’s heroic advance could be little more than a setup for a whole lot of profit-taking this year.
To that end, not one but two different analysts have raised a red flag regarding Nvidia’s core business within the past week and a half. Current and future NVDA stock owners would be wise to hear the same point both were making.
Nvidia’s GPU Market Just Hit a Wall
For those not familiar with the term, GPU is short for graphics processing unit — the mini-computer attached to a computer’s motherboard that’s solely dedicated to handling your computer’s display. On most laptops the GPU isn’t a separate piece of hardware, but still requires graphics-management technology.
Nvidia makes some of the best graphics tech in the world.
Yes, the lull in PC sales and laptop sales took a toll on Nvidia’s GPU business. In that it also makes other computer and mobile device components, though, it was able to sidestep the brunt of that weakness. Some say Nvidia is still makes better technology than Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD) when it comes to netbooks and mobile devices. In that light, the budding rebound in PC sales bodes very well for NVDA stock.
Or, maybe it doesn’t.
Pacific Crest analyst Michael McConnell crashed the party in early April, downgrading Nvidia stock from “sector weight” to “underweight,” explaining he sees “signs of desktop [graphics processing unit] market saturation, lower margins from incremental Nintendo Switch revenue and a possible pause in the company’s datacenter business this summer.”
Were McConnell the only analyst to say something along those lines, it might be dismissible. He wasn’t the only one, though. BMO Capital analysts Ambrish Srivastava and Tim Long chimed in this week with a similar observation, writing of the first quarter:
“For 1Q, our data suggests that shipments were down 16% q-q, much lower than three-year seasonality of down 6%. We believe this represents weakness in the channel versus the super-charged growth we have seen in the past several quarters, particularly for NVIDIA?s graphics business. We also believe this data suggests that weakness in NVIDIA?s gaming business might show up earlier than we had anticipated. We had expected comparisons to become weaker for this business as the year progressed.”
It has not been all bad news. Citi believes, even while acknowledging the positive undertow has slowed, that the fears of a headwind for Nvidia are overblown. Citi analyst Atif Malik even called McConnell’s stance ‘misleading,’ touting the fact that Nvidia’s market share appears to have grown 20%.
With Nvidia stock having gained 224% last year though — the best performer in the S&P 500 — saying fears are overblown still isn’t a strong enough statement to stave off profit-taking now that multiple onlookers are waving red flags.
Bottom Line for NVDA Stock
As is always the case, don’t confuse the stock with the company. Nvidia is doing better than it has in the recent past, and the future looks encouraging. At a trailing price-to-earnings ratio of 37.8 and a forward-looking one of 28.5 though, Nvidia stock has been priced to expectations that are going to be all but impossible to deliver. After a healthy pullback, there’s nothing wrong with wading back in.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.