Nvidia Stock: Headwinds Rated – Buy on Weakness (NASDAQ:NVDA)

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Investment thesis

NVIDIA Corporation (NASDAQ: NVDA) the stock took a beating after a quick rally from its recent lows in March. NVDA bullish investors piled into the action as CEO Jensen Huang and his team showcased his next-generation Hopper architecture for the cloud and data center computing. However, the market was also nervous about weak PC end demand, crushing NVDA stock. As a result, NVDA stock is back to its October lows, 43.4% below its November highs.

Consequently, NVDA’s stock growth premium was significantly digested as investors assessed potential weakness in its gaming segment, impacted by weaker crypto mining and PC weakness. NVDA stock was also initially hurt by Intel’s (INTC) weak Q2 guidance, triggering a selloff last week.

However, AMD’s (AMD) spectacular FQ1 card reassured investors of a PC market that seemed to be held back by weaker end demand. Investors were concerned about a host of factors related to weaker macros, ongoing chip shortages and COVID lockdowns in China. Therefore, we believe that Huang & team will do very well in its next Publication of FQ1’23 results on May 25.

Notably, the NVDA stock growth premium has also moderated significantly and is in line with its 5-year average. Therefore, we believe the opportunity to add more exposure to NVDA stocks has returned for patient investors.

Nonetheless, a bullish trap that lured buyers after its GTC in March had digested its bullish momentum. Given the powerful trap, we encourage investors to spread out their buys and average cost if current support levels do not consolidate and hold.

We reiterate our buy rating on NVDA stock.

Intel worries investors, but AMD comes to the rescue

In our Intel Q1 earnings update, we explained that Intel CEO Pat Gelsinger and his team had guided to a significantly weaker Q2 due to fairly significant headwinds in the consumer PC market. . As a result, investors wondered if NVIDIA stock was next on the “chop” given its built-in growth premium.

However, AMD CEO Dr. Lisa Su reassured semi-investors that pockets of weakness in the PC market were generally confined to the low-end market. Consequently, its data center, cloud, gaming and enterprise segments remain robust as management also raised its guidelines. Dr. Su emphasized (edited):

Our desktop GPU sales nearly doubled year over year, with sales of our Radeon 6000 Series graphics cards being strong. In mobile, the first laptops equipped with our latest Radeon 6000 mobile GPUs were launched during the quarter, and we expect sales to increase in the coming quarters. Data center graphics revenue was flat year over year when we launched our Instinct MI210 accelerators. There is some softness in the PC market. But we had, in recent quarters, shifted our mix to the high end or more premium segments of the PC market, and so that’s where most of our exposure is. (AMD FQ1’22 Earnings Call)

Besides, SIA pointed out that global sales of semi-finished products in the first quarter remained robust, although he digested a whole month of the Russian-Ukrainian conflict. It also reported that global semiconductor revenue rose 1.1% MoM in March. First-quarter sales were $151.7 billion, up 23% year-on-year and down just 0.5% quarter-on-quarter, due to seasonality from the fourth quarter. Additionally, Europe rose 2.6% m/m in March, indicating continued strength. Therefore, we believe the headwinds of a significant slowdown in tractor-trailer sales have been overstated.

Additionally, even though GPU pricing trends dropped significantly in March, the decline moderated in April, according to an update from Tom’s Hardware. Additionally, he also pointed out that GPUs were still selling above MSRP in the current refresh cycle. He pointed out that “the GPU price would normally be 10-20% below MSRP at this point in the refresh cycle.” Additionally, we believe AMD’s strong performance in its GPU segment has demonstrated that these fears have been overstated.

Ada Lovelace’s imminent release and H100 price leadership

Additionally, investors should note that NVIDIA expected to release its RTX-40-series Ada Lovelace GPU this fall. Additionally, NVIDIA has reportedly started testing its AD102 GPU and should be on track for a timely release. We think the new release will likely generate a lot of hype among bullish investors and help support NVDA stocks going forward.

Additionally, in a clear demonstration of price and value leadership, NVIDIA’s H100 Hopper 80GB GPU Accelerator has launched at a “significantly more expensivethan its A100 Ampere predecessor. As a result, we believe NVIDIA has enormous pricing power in its data center business, given the scale and differentiation of its Hopper architecture. Accordingly, investors should not underestimate its leadership in the data center GPU segment.

Notably, we’ll also be looking at NVIDIA’s design win updates for its highly anticipated automotive segment. Qualcomm (QCOM) updated in its FQ2 revenue map that its design pipeline grew to $16 billion from $3 billion previously. Qualcomm CEO Cristiano Amon is optimistic that his “smartphone on wheels” segment could even rival or surpass his smartphone revenue over time.

Investors should remember that NVIDIA estimated its automotive opportunity at $300 billion in its recent spring GTC update. Thus, we encourage investors to watch management’s comments on its automotive design wins in its Q1 chart. 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?

Stock NVDA Yield NTM FCF % and normalized P/E NTM

Stock NVDA Yield NTM FCF % and normalized P/E NTM (TIKR)

NVDA Stock Price Chart

NVDA Stock Price Chart (TradingView)

The NVDA stock growth premium has been significantly digested due to recent headwinds. As a result, its NTM FCF yield moderated to 2.62%, in line with its 5-year average of 2.63%. Additionally, its NTM normalized P/E also normalized at 34.78x, slightly below its 5-year average of 39.93x.

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

However, we have seen a strong bull trap in post-GTC NVDA stock that appears to be digested. Additionally, the stock appears to have found some short-term support. Therefore, further consolidation at current levels should be helpful for NVDA stock going forward.

As such, we reiterate our buy advice on NVDA stock.