Nvidia Stock: Headwinds Priced In – Buy On Weakness

[view original post]

David Becker/Getty Images News

Investment Thesis

NVIDIA Corporation (NASDAQ:NVDA) stock has been battered after a rapid recovery from its recent March lows. Bullish NVDA investors piled into the stock as CEO Jensen Huang & team introduced its next-gen Hopper architecture for cloud and data center computing. However, the market was also skittish over the weakness in PC end demand, thrashing NVDA stock. As a result, NVDA stock has retraced to its October lows, 43.4% below its November highs.

Therefore, NVDA stock growth premium has been digested significantly, as investors priced in potential weakness in its gaming segment, impacted by weaker crypto mining and PC weakness. NVDA stock was also initially impacted by Intel’s (INTC) weak Q2 guidance, triggering a sell-off last week.

However, AMD’s (AMD) spectacular FQ1 card reassured investors of a PC market that seemed hampered by weaker end demand. Investors were concerned with a multitude of factors relating to weaker macros, ongoing chip shortages, and China’s COVID lockdowns. Therefore, we think Huang & team will do just fine in its upcoming FQ1’23 earnings release on May 25.

Notably, NVDA stock growth premium has also moderated significantly and is in line with its 5Y mean. Therefore, we think the opportunity to add more exposure to NVDA stock has returned for patient investors.

Nevertheless, a bull trap that lured buyers after its GTC in March had digested its upward momentum. Given the potent trap, we encourage investors to spread their purchases and dollar-cost average if the current support levels do not consolidate and hold.

We reiterate our Buy rating on NVDA stock.

Intel Worried Investors, But AMD Sprung To The Rescue

In our Intel Q1 earnings update, we discussed that Intel CEO Pat Gelsinger & team guided to a markedly weaker Q2 due to pretty significant headwinds in the consumer PC market. As a result, investors were concerned about whether NVIDIA stock was next on the “chopping block” given its embedded growth premium.

However, AMD CEO Dr. Lisa Su assuaged semi investors that the pockets of weakness in the PC market were generally limited to the lower-end market. Therefore, its data center, cloud computing, gaming, and enterprise segments remain robust as management also raised guidance. Dr. Su accentuated (edited):

Our Desktop GPU sales nearly doubled year-over-year as sales of our Radeon 6000 Series graphics cards were strong. In mobile, the first notebooks featuring our latest Radeon 6000 mobile GPUs launched in the quarter, and we expect sales to ramp over the coming quarters. Data center graphics revenue was flat year-over-year as we launched our Instinct MI210 accelerators. There is some softness in the PC market. But we had, for the last number of quarters, actually been shifting our mix to the higher end or the more premium segments of the PC market, and so that’s where more of our exposure is. (AMD’s FQ1’22 earnings call)

Furthermore, SIA accentuated that global semi sales in Q1 remained robust, despite digesting a whole month of the Russia-Ukraine conflict. It also reported that global semiconductor revenue was up by 1.1% MoM in March. Q1 sales were $151.7B, up 23% YoY and down just by 0.5% QoQ, due to seasonality from Q4. Furthermore, Europe was up 2.6% MoM in March, indicating continued strength. Therefore, we think the headwinds of a significant slowdown in semi sales have been overblown.

Furthermore, even though the pricing trends for GPU were down significantly in March, the decline moderated in April, according to a Tom’s Hardware update. Furthermore, it also highlighted that GPUs were still sold above MSRP in the current refresh cycle. It emphasized that “GPU pricing would normally be 10 to 20% below MSRP at this point in the refresh cycle.” In addition, we think AMD’s robust showing in its GPU segment demonstrated that such fears had been overstated.

Ada Lovelace Impending Release & H100 Price Leadership

Furthermore, investors should note that NVIDIA is expected to release its RTX-40 series Ada Lovelace GPU this fall. In addition, NVIDIA has reportedly started to test its AD102 GPU and is expected to be on track for its timely release. We believe the new release will likely generate much hype among bullish investors and help support NVDA stock moving forward.

Furthermore, in a clear demonstration of price leadership and value, NVIDIA’s H100 Hopper GPU 80GB accelerator was released at a price “considerably more expensive” than its A100 Ampere predecessor. Therefore, we believe NVIDIA has tremendous pricing power in its data center business, given the scale and differentiation of its Hopper architecture. As a result, investors should not understate its leadership in the data center GPU segment.

Notably, we will also be looking to NVIDIA’s design win updates for its highly anticipated automotive segment. Qualcomm (QCOM) updated in its FQ2 earnings card that its design pipeline has increased to $16B, from $3B previously. Qualcomm CEO Cristiano Amon is optimistic that its “smartphone on wheels” segment could even rival or trump its smartphone revenue over time.

Investors should recall that NVIDIA estimated its automotive opportunity to be worth $300B in its recent spring GTC update. Thus, we encourage investors to watch management’s commentary on its automotive design wins in its Q1 card. We also believe the market has yet to fully appreciate what could be NVIDIA’s most exciting revenue contributor, given its scale and rapid adoption.

Is NVDA Stock A Buy, Sell, Or Hold?

NVDA stock NTM FCF yield % and NTM normalized P/E (TIKR)

NVDA stock price chart (TradingView)

NVDA stock growth premium has been substantially digested due to the recent headwinds. As a result, its NTM FCF yield has moderated to 2.62%, in line with its 5Y mean of 2.63%. Furthermore, its NTM normalized P/E has also normalized to 34.78x, slightly below its 5Y mean of 39.93x.

Of course, NVDA stock still traded well above its peers and the market. Therefore, investors should continue to expect near-term volatility. But, we are confident that its long-term thesis remains intact. And we think the recent headwinds over potential end demand weakness have been priced in.

However, we observed a potent bull trap in NVDA stock post-GTC that seems to be digested. In addition, the stock seems to have found near-term support. Therefore, a further consolidation along the current levels should be helpful for NVDA stock moving forward.

As such, we reiterate our Buy rating on NVDA stock.