NVIDIA stock seems to have stabilized after taking a huge hit from a pair of analyst downgrades on Thursday. The shares recorded their biggest-ever plunge in a single day, ending their record streak of closing prices that beat their 50-day moving average. Nomura analysts downgraded NVIDIA stock two notches, while BMO Capital Markets analysts cut their rating one notch, with both moving to the equivalent of a Sell rating.
NVIDIA stock now overvalued
In a research note dated Feb. 23, BMO analyst Ambrish Srivastava said he cut his rating for NVIDIA stock from Market Perform to Underperform and slashed his price target from $100 to $85 per share. He believes the chip maker’s shares are now overvalued and that the “perfect storm in fundamentals that drove the rarely seen magnitude of earnings upside is ebbing.” He also warned that the competitive environment is changing, which will present a problem for NVIDIA. He doesn’t believe the competitive risk is adequately reflected in the stock price.
Specifically, he sees the gaming and data center business environments changing. He said end demand in gaming is improving, and noted that the chip maker’s successful transition to FINFET technology resulted in a much bigger improvement in performance than the previous nodes did. It also came a bit later than he had been expected and resulted in sizable pent-up demand. He doesn’t believe that this will happen again soon.
Intel now posing a threat to NVIDIA
He sees Intel as presenting a new challenge to NVIDIA in data centers, as it is in the process of refreshing its product lineup. The BMO analyst warned that pricing might pose a problem as well, and he feels that NVIDIA’s dominance in this area is pushing large data center customers to consider switching to products by Advanced Micro Devices.
Nomura analyst Romit Shah downgraded NVIDIA stock by $10 to $90 per share and slashed his rating from Buy to Reduce. The concerns he raised in his Feb. 22 research note were similar to those raised by Srivastava. For example, he’s also concerned about the gaming segment and predicts a slowdown in that area.
He feels the consensus isn’t fully appreciating this slowdown he expects and the size of the impact it could have on NVIDIA’s stock multiple. He added that the chip maker’s multiple averaged two time EV/sales over the last ten years, but in the last 12 months, this multiple rose to seven times, marking a 10-year peak on an absolute and relative basis to its sector.
Rotate to Intel from NVIDIA stock
One area of difference between Shah’s view and Srivastava’s view is that Shah sees data centers as one area of “solid long-term growth” for NVIDIA. The 205% year over year growth in data center revenue and 39% growth in automotive revenue reinforces investors’ view of NVIDIA as the leader in autonomous driving (it did pick up a contract with Tesla) and artificial intelligence, both of which he sees as “sizeable” opportunities for the chip maker.
However, he feels that the implied value being assigned to the two segments isn’t sustainable. As a result, he’s recommending profit taking from NVIDIA stock and a rotation into Intel stock.
After tanking on Thursday, shares of NVIDIA stabilized on Friday and rose to as high as $101.40.