Nvidia has fallen victim to market negativity towards tech since the beginning of the year, but this NASDAQ stock could have the fundamentals to ride out the storm and return stronger and fitter.
Nvidia [NAS:NVDA], the US tech company, is proving that down doesn’t necessarily mean down and out. At least that is what investors are hoping. Despite increased analyst scepticism about Nvidia, and the tech sector as a whole, investors remain optimistic about the company’s long-term prospects.
The software and fabless company, which designs graphics processing units (GPUs), application programming interface (APIs) for data science and high-performance computing and system on a chip units, saw its stock fall 2.4% in trading yesterday (12 July).
This fall-back followed news that Harsh Kuman, an analyst at Piper Sandler, cut the target price for the stock in a research note, on concerns surrounding the impact global trends could have on the company’s performance. Piper Sandler lowered the target price from USD250 to USD235.
Kumar said the decision was based upon: “continued issues in China and Russia, gaming laptop weakness, consumer pressure and our concerns on crypto.”
Staying overweight
Other factors that could hurt the Nvidia’s performance included a possible downturn in demand as inflation causes consumers to pull back on spending, along with the lower interest in mining amidst the collapse of cryptocurrency values. Despite the lower target price, Kumar maintained an overweight rating for the stock.
Although Nvidia initially built its reputation developing advanced GPUs for video games, its business has significantly expanded to include everything from vehicle display screens to countless electronic devices. More recently, Nvidia has benefitted from global supply chain issues. As Bitcoin miners looked to cash in on the cryptocurrency frenzy, the price of chips soared leading to a lack of product in the market. However, as the crypto bubble deflated, so too the profitability prospects for consumer graphics cards.
Richard Gardner, chief executive of Modulus Global, a trading and exchange software prover to brokerages and professional traders, said: “First, you have the ongoing economic climate that will naturally limit sales, then the simultaneous drawback among crypto miners.” Gardner explained that the overriding concern for Nvidia and its peers is that the crypto mining sector is in big trouble.
“I think the biggest issue isn’t that miners aren’t a profitable customer segment in the near-term, but, rather, that many of them will likely be trying to offload mothballed merchandise that they already have onto the second-hand market, to attempt to salvage their balance sheets, further decreasing demand,” he said.
Surplus chips
Some of Gardner’s concerns are already impacting Nvidia. Sales of the firm’s GPUs are grinding to a halt, as the secondary market floods with used chips well below retail price. There has also been speculation that Nvidia could mothball its next generation GPUs to unload surplus supplies of its current chips. The war in Ukraine will negatively impact Nvidia’s second quarter revenue.
Notwithstanding, investors remain optimistic about Nvidia’s overall prospects and think the downturn in the stock’s price could actually be a good investment opportunity for long-term investors.
Victoria Mendoza, tech sector analyst and chief executive of MediaPeanut, said: “I believe these are just seasonal challenges that will bear no significant impact on NVIDIA’s future prospects in the coming years,”
Mendoza continued: “While the dip in the stock’s price and the termination of its acquisition of UK’s ARM have led to a major dip in its profits, I see the current economic headwinds, supply chain problems, high inflation and overall macroeconomic uncertainty of computer processor demand brought about by the Russia-Ukraine war as just minor challenges that would hardly touch on the possible revenues of the company,”
She remains positive on Nvidia, stating that if the company remains focused on producing high-end chips for gamers and Artificial Intelligence technology, that the company will be more than able to navigate choppy waters. Citing Nvidia’s 2Q22 update that saw Nvidia announce an increase of year-on-year sales of 46%, the prospects of returning to strong growth are good.
However, Nvidia has been caught in the negative down winds affecting the whole tech sector. The firm started 2022 trading at USD301.21, but has been sinking since; hitting a 52-week low of USD140.55 on 5th July before creeping back to USD151.22 on 11th July. The stock hit a USD346.47 52-week high on 22nd November 2021.
