Nvidia (NASDAQ:NVDA) is certainly a great company with many fantastic, cutting-edge products. Nonetheless, given upcoming potential threats that the company’s data center and gaming business are facing, along with the high valuation of NVDA stock, I recommend that investors avoid the shares for now.
I’ve long admired Nvidia and its chips for data centers, video games, and vehicles.
Multiple data points and statements provided by the company in conjunction with its second quarter results made me more upbeat on Nvidia as a company. For example, the firm’s CEO, Jensen Huang, in a statement, reported that “the world’s top cloud service providers and server makers [are] moving quickly to offer NVIDIA accelerated computing. Mellanox [which was acquired by Nvidia earlier this year] grew sharply, driven by the need for high-speed networking in cloud data centers to scale-out AI services.”
Since early this year, I’ve emphasized the importance of advanced AI for data center chips. Given this importance, the apparently high demand for Mellanox’s products for developing AI for data centers is certainly very positive. Similarly, Nvidia’s statement that the company “Set 16 AI performance records on the latest MLPerf benchmarks” is quite positive for NVDA stock.
Moreover, Nvidia’s data center revenue soared an extremely impressive 167% year-over-year in Q2, reaching $1.75 billion. (It’s important to note, however, that 30% of that revenue came from Mellanox which Nvidia did not own in Q2 of 2019.) Finally, the 26% YOY jump of its gaming revenue was also quite positive.
Multiple Threats Loom for Nvidia
In a March 2020 column on Nvidia, I wrote that
“A recent innovation by Rice University, achieved in collaboration with Intel (NASDAQ:INTC), looks poised to threaten Nvidia’s competitive advantage when it comes to AI. Specifically, the researchers reportedly have been able to radically increase the speed of Intel’s Xeon chips which are used for AI training. As a result, Xeon is now “3.5 times faster than Nvidia’s Tesla (chips) in AI deep learning,” according to wccftech.“
Other websites now appear to be starting to recognize the threat that Intel poses to Nvidia. The new version of the Xeon chip uses significantly lower power, “can also scale to higher frequencies,” and contains many more “execution units” and data than its predecessor, according to Ars Technica The website added that the “write once, run anywhere” capability of Intel’s new Xeon chip will make it appealing to AI developers. It’s certainly possible that the increased speed of the Xeon I described in my previous column helped enable these upgrades.
Further, the reduced latency of CPUs like Xeon compared to Nvidia’s GPUs “can frequently make the CPU an acceptable — or even superior — alternative” for AI functions, Ars Technica stated. And CPUs’ lower “power, space, heat, and cost constraints” can enable them to function better on the edge, according to the website. The edge is becoming an increasingly popular alternative to data centers.
Finally, the website quoted Intel as saying that Xeon would provide”market leading” performance in the video-game space in the near-term.
And TheStreet’s Eric Jhonsa recently wrote about “transistor and capacitor technology improvements” made by Intel. The company refers to these improvements as Superfin. According to the reporter, Intel “claims that SuperFin… will deliver 17% to 18% better transistor performance than what Intel’s first 10nm transistors delivered.” The company’s discrete GPUs will use Superfin, Jhonsa noted. Superfin could enable Intel to take share away from Nvidia in both the video-game and data center markets.
Meanwhile, given Activision Blizzard’s (NASDAQ:ATVI) recent, less-than-stellar Q3 guidance amid easing lockdowns, the video-game sector could easily slump this quarter, hurting Nvidia’s gaming revenue. Finally, Nvidia’s guidance of a roughly 1%-5% increase in data center revenue in Q3 versus Q2 also makes me less upbeat about its data center unit.
The Bottom Line on NVDA Stock
Nvidia has outstanding products and reported very strong Q2 results. Nonetheless, Nvidia’s data center and gaming businesses appear to be facing a looming threat from Intel. Further, its gaming unit could be hurt by weakening video-game sales amid the easing lockdowns.
With NVDA stock trading for 25 times its trailing sales, I would not recommend buying the shares at this point.
As of this writing, Larry Ramer did not own any of the aforementioned stocks. Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.