Investors are looking for safer bets and have dumped several tech names over demand concerns amid the ongoing macro uncertainty and high inflation. Shares of Nvidia (NASDAQ: NVDA), a leading maker of graphics processing units (GPUs), have tanked 46% year-to-date.
Weak GuidanceDespite reporting better-than-anticipated fiscal first-quarter results last month, Nvidia failed to impress investors due to its weak second-quarter guidance.
The company expects a hit of nearly $500 million to its Q2 FY23 revenue due to the situation in eastern Europe, and the COVID-19 lockdowns in China. Investors are also concerned about the extent to which the crash in cryptocurrency will impact the crypto-mining driven demand for Nvidia’s GPUs.
Overall, Nvidia expects Q2 FY23 revenue to come in at “$8.1 billion, plus or minus 2%.” The company expects the “strong” sequential growth in the revenue from Data Center and Automotive segments to be more than offset by the sequential decline in Gaming revenue.
Wall Street’s TakeRecently, Bank of America Securities analyst Vivek Arya named Nvidia and On Semiconductor (ON) as his top semiconductor picks. Arya expects Nvidia, along with Advanced Micro Devices (AMD) and Marvell Technology (MRVL) to gain from the shift to the cloud, while he expects ON, Analog Devices (ADI) and NXP Semiconductors (NXPI) to benefit the most from their exposure to auto electrification.
Arya stated, “Our top picks serve end-markets where we expect spending/content growth drivers to be most resilient, such as in cloud computing/AI, high-end industrial, EV/advanced driver assist systems and in rising chip complexity.”
Arya feels that at the current levels, semiconductor stocks seem compelling on a relative basis compared to industrial and infotech stocks in the S&P 500. Moreover, he argued that catalysts such as the easing of China lockdowns could “re-energize investor interest back in the sector.”
Overall, Nvidia scores a Strong Buy consensus rating based on 27 Buys and four Holds. The average Nvidia price target of $275.27 implies 73.47% upside potential from current levels.
ConclusionNvidia is expected to face near-term headwinds due to macro challenges, but most of the Wall Street analysts continue to be optimistic about the company’s growth prospects in the years ahead. This is based on the strong demand in the firm's key end-markets, including gaming, data centers, automotive, AI applications, and the multiverse.
On TipRanks Smart Score system, Nvidia earns a nine out of 10, which implies that the stock is likely to outperform the broader market.
Also, TipRanks Hedge Find Activity tool indicates that the Confidence Signal for Nvidia is Very Positive, with hedge funds increasing their holdings in Nvidia by 1.3 million shares over the last quarter.
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In an upbeat research note, Oppenheimer analyst Rick Schafer laid out the bull case for buying Nvidia (NVDA) stock -- why he rates it "outperform" and expects Nvidia shares to nearly double to $300 over the next 12 months. (To watch Schafer's track record, click here)
As Schafer tells it, Nvidia's software and chips have made the company essential to the "AI ecosystem," giving Nvidia management "unique visibility as they develop products in lockstep with cloud hyperscale customers." The company's central position in AI also helps to make available to Nvidia multiple levers that it can pull, to keep its growth going despite the Fed's efforts to slow the economy. These include not just AI (artificial intelligence), but also chips used data centers (DC), and of course the company's flagship gaming chips business as well.
Granted, in the near term, Nvidia will likely hit some speed bumps. In particular, COVID-19 lockdowns in China and lost demand for semiconductors due to the Ukraine/Russia conflict are likely to subtract about $500 million in revenues that Nvidia would otherwise have booked in Q2. This will result in an absolute, sequential decline in gaming revenues in the quarter. Networking revenues will also probably face "constraint" in the quarter. Finally, Schafer discussed the elephant in the room -- cryptocurrency mining -- noting that a decline in the price and demand for Ethereum may "materially" affect whatever (still unknown) portion of Nvidia's revenues derive from GPUs sold and repurposed by its customers for cryptocurrency mining.
On the other hand, data center revenues are expected to climb sequentially in Q2, and by Q3, Schafer sees Nvidia beginning to fire on all cylinders again. "NVDA's platform of CPU, GPU, DPU" (respectively, central processing units, graphics processing units, and data processing units) "and software work together to enable an accelerated computing ecosystem," explains Schafer, helping to sustain sales. Additionally, in Q3 the analyst sees Nvidia releasing its long-awaited new Ada Lovelace GPU chips for gaming.
The H100/Hopper GPU is also expected to ramp production in Q3, "extending NVDA's AI training/inference lead." And Schafer believes that this Hopper GPU, alongside the Grace CPU superchip, will drive "the next wave of AI applications including Digital Twins (virtual worlds), transformers and large language models capable of interpreting context/meaning."
In the near term therefore, gaming revenues and GPU sales will probably help to lead Nvidia stock higher this year. Longer term, though, sales of chips to develop AI applications may turn out to be the strongest card in Nvidia's deck.
Overall, Wall Street would tend to agree with this bullish outlook – as shown by the 27 to 4 breakdown in recent reviews, favoring Buys over Holds and supporting a Strong Buy consensus view. NVDA is trading for $156.27 and its $275.27 average price target implies an upside of 76% in the next 12 months. (See NVDA stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.