When the market closes on Tuesday, Nvidia Corporation (NASDAQ:NVDA) will report its first-quarter results and many investors will likely be nervous. For the year so far, NVDA stock has not had much traction. Consider that the return is -2%.
This is certainly in stark contrast to last year’s performance, where NVDA stock racked up an impressive 224% gain.
So in light of this, it should be no surprise that things have cooled down. There has also been growing skepticism from Wall Street analysts. The consensus price target is roughly $110, which implies a mere 4% potential return.
So why the bearishness? Well, for the most part, the main concern is that the growth engine will not be able to maintain its hyper-speed. Let’s face it, the chip industry is prone to periodic swings in demand, say from lower economic growth, rising competitive forces and disruptive changes in technologies.
Something else: cutting-edge technologies can take time to get traction. Hey, just take a look at virtual reality. A couple years ago, the market was forecasted to generate substantial revenues. But so far, the results have been lackluster. The technology from operators like Facebook Inc (NASDAQ:FB) have been bulky and unwieldy. There have also been no must-have applications.
Graphics Business to Hurt Nvidia Stock
OK, so what are the parts of the NVDA business that are in jeopardy? One is the market for self-driving cars. Granted, there are few signs that the demand is lagging. But then again, this has attracted some of the world’s largest chipmakers. Back in early March, Intel Corporation (NASDAQ:INTC) agreed to pay $15 billion for Mobileye NV (NYSE:MBLY). And of course, Qualcomm, Inc. (NASDAQ:QCOM) has also jumped into the fray with a $39 billion bid for NXP Semiconductors NV (NASDAQ:NXPI).
Although, perhaps the biggest risk factor for Nvidia stock is its core gaming business, which accounts for 62% of revenues. Keep in mind that there are already signs that the momentum is decelerating. According to a report from DigiTimes, the two largest PC motherboard firms are reporting lower volumes for shipments of GPUs. In fact, NVDA has been substantially reducing the pricing on its chipsets.
Various Wall Street analysts are also sending out warnings. BMO Capital Markets’ Ambrish Srivastava and Tim Long recently noted that the first quarter saw a 16% plunge in GPU shipments. While there is typically a drop because of seasonality, the average is usually about 6% or so. In light of this, BMO has a dire price target on NVDA stock of $85.
Bottom Line on NVDA Stock
There are several factors that are driving the slowdown in demand. First of all, it looks like the graphics market is at a saturation point, with not as much upgrade activity left. What’s more, it looks as if Advanced Micro Devices, Inc. (NASDAQ:AMD) is becoming a serious threat. Over the past few years, the company has been investing aggressively to improve its product line. And for the most part, the efforts are starting to pay off.
It’s as if Nvidia has been caught off guard. Then again, AMD has a long history of blunders and flubs. Yet the company has a CEO, Lisa Su, who has been making the right decisions — and who was not afraid to make bold risks.
And finally, another thing to consider about NVDA stock is that the valuation is essentially baking in mostly good news. The price-to-earnings multiple is at a nose-bleed 40X. By comparison, Texas Instruments Incorporated (NASDAQ:TXN) trades at 21X and Xilinx, Inc. (NASDAQ:XLNX) trades at 27X.
In other words, with the lofty valuation of Nvidia stock and the potential for a larger-than-expected drop-off in the core gaming business, it’s probably best to hold off before the earnings report.
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.