Suddenly, after posting a 31% loss in 2018, Nvidia (NASDAQ:NVDA) is a hot stock again. Shares of the graphic-chip maker bounced more than 10% on Jan. 3 – Jan. 4, rising from about $127 to the Jan. 8 opening price of about $143 per share.
The question for investors as the Consumer Electronics Show (CES) opened in Las Vegas was whether this is the start of a real comeback for Nvidia, or just a short-term readjustment. A lot depends on what happens in cloud data centers, an industry still growing at 32% per year according to Synergy Research Group.
While that growth will slow as the numbers get bigger, the business will still double in four years, said chief analyst John Dinsdale and a lot of the new spend will be on adapting clouds to fast-twitch applications in artificial intelligence, where Nvidia graphics chips dominate.
If that were all there were to the story, a buy order would be the obvious choice. But it’s not.
Recession or Depression
Nvidia sales peaked in the April quarter of 2018, at $3.2 billion, with investors expecting just $2.7 billion in revenue for the January quarter, which will be reported Feb. 14. That is due to come with a dramatic fall in profits, to $1.19 per share.
That sounds horrible, but Nvidia finished fiscal 2018, last January, with earnings of $4.82 per share.
Much of the blame for the slower earnings has been shifted to cryptocurrency. Nvidia chipsets are great for mining bitcoin, but when the bitcoin market crashed, so did demand for mining rigs. The assumption has been that data center demand will pick up the slack, either in the current quarter or later this year.
But will it?
The Cloud Czars are notoriously cheap, knowing that any chip they choose must be bought in the millions, so both Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) are working on their own cloud graphics chips. Microsoft (NASDAQ:MSFT) is hiring engineers for similar work.
This has always been the case. Cloud Czars like Facebook (NASDAQ:FB) pioneered the use of open source and standard designs, and the industry has followed this lead eagerly.
That means there will be continual pricing pressure on Nvidia’s data center chips.
The Game’s the Thing
Clouds were not Nvidia’s original market. Gaming systems were, and Nvidia CEO Jensen Huang put his emphasis squarely on this niche at the Consumer Electronics Show this week, announcing a new gaming card costing just $349.
Desktop video gamers have felt shut-out by the crypto craze, as it kept prices of Nvidia boards sky-high. Now Nvidia is re-committing to this mass market. But this, too, may be a sign of weakness for Nvidia stock, according to RBC analyst Mitch Steves, who nevertheless has a “buy” rating on NVDA, with a price target of $200 per share. Still, he sees the current quarter revenue as soft, at the low end of the company’s guidance.
The Bottom Line on NVDA
Nvidia has become a battlefield stock, with lots of options being sold on the assumption of minimal price movement. Nvidia was such a hot stock from 2016-2017 that value investors are likely to pile in but then be disappointed, as its turnaround will take time to develop.
At its current price, the stock is selling for 10 times revenue, although the price-earnings multiple is a decent 19. But the P/E measures past earnings. There is almost certain to be an earnings slowdown. Nvidia’s pricing power is under threat in its key niches. That problem won’t disappear all at once.
Nvidia is a great company, but it’s still an expensive stock. Don’t name your new puppy for it.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.
