Nvidia Stock Has More Downside Potential Ahead As GPU Demand Slows

NVDA stock - Nvidia Stock Has More Downside Potential Ahead As GPU Demand Slows

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After sinking 5.2% on Monday, graphics card company, Nvidia (NASDAQ:NVDA) recovered some of its losses in early morning trading but is back down 1.7% today. NVDA stock has performed robustly over the past year, soaring 41%, but has since lost 28% year-to-date. The bearish momentum steepened recently, indicating that the downturn is not out of the cards, following slowing GPU demand and high valuation multiples.

Last year, surging interest in Ethereum (ETH-USD) mining, a complex GPU calculation process, drove GPU demand to historical highs. At the same time, the chip supply shortage and the business activity slowdown prompted by the Covid-19 pandemic pushed GPU prices and margins higher, contributing to NVDA’s stock rally.

The GPU buying frenzy seems now to have cooled down, following the expected deployment of The Merge in the second half of 2022. The blockchain update consisting of switching to a proof-of-stake validation consensus will make GPU Ethereum mining obsolete. With demand for GPU mining expected to slow this year and chipmakers looking to increase capacity to cope with chip shortages, Nvidia’s profitability will go down, bringing its ballooned valuation to fairer levels.

The chip company posted solid fiscal fourth-quarter 2022 results, delivering a 21.9% bottom-line expansion to $3 billion. This represented a profit margin of 39.3%, one of the strongest quarterly performances of the company. Next quarter estimates are less exciting. The first-quarter fiscal year 2023 earnings are expected to decline 40% to $1.8 billion, significantly impacting profit margins, estimated to decline to 22.3%. This will bring additional downside to NVDA stock.

Moreover, Nvidia has overstretched valuation multiples, trading at 34.1x forward EV/EBITDA and offering a forward P/E ratio of 49.2x. Recently, Baird analysts pulled the outperformance rating, slashing Nvidia’s target price from $360 to $225 per share, bringing renewed headwinds to the stock.

With that being said and even if the GPU specialist grows at a fast clip, investors should adopt a wait-and-see approach before jumping into the leading GPU manufacturer. For now, downside risks should continue to weigh on NVDA stock and investors might consider waiting for better prices before averaging down.

On the date of publication, Cristian Docan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Cristian Docan, a contributor for InvestorPlace.com, has been writing stock market-related articles for Seeking Alpha, Stocknews, and Wealthpop since 2017. He takes a fundamental and technical approach in evaluating stocks for readers, focusing on momentum investing and macro-driven strategies.

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