Nvidia Corporation (NADSAQ:NVDA) has gotten off to a volatile start this year. But this should not be a surprise. Note that Nvidia stock rocketed 224% last year.
![NVDA Stock: 3 Scary Signs for Nvidia Corporation (NVDA) Stock](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
So yes, some type of correction is normal. Let’s face it, there are plenty of investors who want to take some of their winnings off the table.
Yet might there still be more on the downside for NVDA stock?
Well, it’s true that NVDA stock is among the best in tech. For more than 20 years, the company has trail-blazed the development of GPUs (Graphics Processing Units). Along the way, Nvidia has leveraged the technology into a myriad of high-growth markets like AI (Artificial Intelligence), self-driving cars, VR (Virtual reality), the Internet of Things (IoT) and cloud computing.
The key is that GPUs can process massive amounts of data — at cost-effective levels.
But I think that — for now — much of the good news has been baked into Nvidia stock. In fact, there are also some important risk factors that can easily derail the momentum. So let’s take a look:
Nvidia Stock Issue No. 1: Demand for the Graphics Business
Despite all the various business lines, NVDA still gets a hefty 84% of its revenues from its GPU business. But this could prove to be a problem — that is, there are signs that demand is starting to soften. This is the conclusion from DigiTimes, which notes that two of the world’s largest PC motherboard operators have reported lackluster shipments in Q1. Keep in mind that NVDA has already been slashing the pricing on its GTX 1080. There’s even buzz that there will be a price war.
So what’s going on here? Interestingly enough, one factor is that the upgrade cycle may have peaked. What’s more, the expectations for the VR market may have proven to be overblown, as seen with tepid demand for offerings from Facebook Inc (NASDAQ:FB) and HTC.
Consider that Wall Street analysts are also getting antsy about the GPU market. Pacific Crest analyst Michael McConnell recently noted that there are indications of “market saturation” and BMO Capital analysts Ambrish Srivastava and Tim Long wrote that “[f]or 1Q, our data suggests that shipments were down 16% q-q, much lower than three-year seasonality of down 6%.”
NVDA Stock Issue No. 2: Competition
With demand for GPUs looking iffy, NVDA will also have to deal with more competitive pressures. Of course, the resurgence of Advanced Micro Devices, Inc. (NASDAQ:AMD) is likely to be the main threat. After several years of restructuring and savvy R&D spending, the company is launching several chips, like the Ryzen CPUs and the Vega, that will likely eat into NVDA’s marketshare.
AMD may also wind up disrupting the relationship between Intel Corporation (NASDAQ:INTC) and NVDA (the partnership ends this month).
But NVDA should also feel the pressure on the auto segment. After all, the industry is seeing tremendous consolidation, such as with Intel’s proposed acquisition of Mobileye NV (NYSE:MBLY) and Qualcomm, Inc.’s (NASDAQ:QCOM) purchase of NXP Semiconductors NV (NASDAQ:NXPI). In other words, these deals will bring much more scale to critical technologies in the auto sector.
NVDA Stock Issue No. 3: Lofty Valuation
Nvidia stock trades at price-to-earnings multiple of 41X. By comparison, INTC is at 178 and Texas Instruments Incorporated (NASDAQ:TXN) sports a multiple of 23X.
It’s true that NVDA stock deserves a premium because of its strong growth. But then again, the valuation may be a bit of a stretch. Let’s face it, the chip industry is subject to extreme swings and competitive pressures.
In fact, Nvidia stock has already shown that it is highly sensitive. For example, in mid-February there was a roughly 10% drop because of negative comments from Wall Street analysts.
So, if there are real signs of fundamental weakness — such as with the next earnings report — NVDA stock could be particularly vulnerable.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.