Nvidia: Bulls Versus Bears

Written by Nathaniel E. Baker, Seeking Alpha editor and contributor.

NVIDIA Corporation (NVDA) shares plunged almost 17% on November 15 after the company"s third-quarter earnings missed revenue projections. NVDA beat EPS estimates but the disappointing revenue numbers, together with downside guidance were too much for the market to bear.

Speaking of bears, the sell-off prompted a number of pessimistic articles on Seeking Alpha, but also a few arguing the stock was a bargain -- or soon will be, if it declines further. Who"s right? Only time will tell. But both make some valid points. Let"s take a look.

Bulls

• The bull thesis, or at least the long-term thesis, is still intact, according to Okapi Research. NVDA is a strong buy at these levels, with the current price providing a "generational buying opportunity." The earnings miss can be tied to short-term factors, including a product upgrade cycle and short-term demand headwinds from currency mining. Nvidia remains the leader in graphics processing units, or so-called GPUs, and the company is exposed to growing demand for computer power of all kinds.


• There are a number of positive growth catalysts over the long term, writes Nima Abbaszadeh. The new Turing architecture "is the first GPU to integrate real-time ray tracing, a rendering technique that allows for more realistic lighting, reflections, and shadows in games." The company"s datacenter business has grown exponentially in recent quarters. Nvidia just announced a collaboration with Chinese car companies, through which it will provide Xavier AI driving chips to develop autonomous vehicle hardware. The company is well-positioned but the positive factors are being forgotten as pessimism becomes the order of the day. All of this negative sentiment opens up a buying opportunity.


• Nvidia"s future prospects are bright and Mycroft Friedrich has "little doubt the company will recover to its former glory." Nvidia is a key player in the high growth industries of gaming, professional visualization, datacenters and high-tech automotive. It has gone from overbought to fairly valued and will sooner or later become oversold. Friedrich"s oversold price is $124.24 per share, 57% below its Oct. 1 high.

Bears

• Nvidia"s problems go deeper than its lackluster earnings numbers, according to EnerTuition. The company"s guidance around shipments of its mid-range Pascal GPU chips, while negative, may still be inflated, masked by pull-ins. There are other signs that revenues will continue to disappoint for many quarters to come: a lot of growth in the gaming segment may in fact be due to the cryptocurrency market, and datacenter growth is a result of ASP increases, not unit growth. Nvidia revenues have moved to a lower base. "We now foresee a low single-digit growth or even negative growth for NVDA going forward." The decline has just begun and the stock may be an excellent short sale candidate.


• The longer-term bull story is over, writes Trapping Value. The semiconductor industry is cyclical and Applied Materials" divergence in September showed that the cycle was beginning to turn. The bursting of the crypto bubble has aided this cyclicality. NVDA now faces year-on-year revenue declines of 7%, based on its forward guidance. "So the "growth" part of the story is over. NVDA is about to get reacquainted with normal valuation rules." The last time this happened, the stock dropped 80%, and the secular forces are stronger this time.


• Nvidia"s revenue miss and its lower-than-expected forward guidance suggest the slowdown in business is far greater than was anticipated, according to Victor Dergunov. Still Wall Street analysts remain remarkably bullish on the stock, with a consensus price target of $300. But at current prices, NVDA is far from cheap. There may be a relief rally, which investors should use as an opportunity to lighten up on positions.


• Akram"s Razor considers Nvidia uninvestable, saying there are two more quarters of crypto-fueled comparisons to lap, and that the datacenter segment is going to see much more competition in months to come. He"s been the axe on the stock so far, and his analysis of the company"s credibility (or loss thereof) carries weight.

Conclusion

The bearish argument that Nvidia"s problems are due in no small part to economic cyclicality would appear to hold water when one considers how many growth stocks are now in bear market territory. But then, there have been signs of a top before and the rally in tech stocks was certainly not sustainable over the long term. Even cryptocurrencies have seen steep declines at various points the last couple of years -- always followed by some recovery.

Indeed, some Seeking Alpha commenters are ready to pile back in to NVDA. "This is the time to be buying shares of NVDA, MU, AMD and other chip related tech stocks," says novavax#1. "The past few months have given all the opportunity to buy at much, much lower pps now. As we all know, pps of these stocks will eventually recover & be higher than they are presently."

Other commenters echoed the bullish sentiment. "Shares trade at just 25 forward earnings," said Jon D. Markman. "As the market for AVs becomes apparent, Nvidia is set to be the biggest winner. In other words, this dip in the stock looks very attractive as an entry point."

"Sure there are some issues, they didn"t get the crypto market right, but the fundamentals are there," wrote disruptive. "Screaming Buy at these prices. I cannot buy enough."

To be sure, there was a fair share of bearish comments. "It"s a total value trap right now," wrote Orangejulius. "The ethereum/equihash/neoscrypt bubble has burst and we now found out more than half of Nvidia"s PGU sales for 3 quarters were mining related. Now those GPUs are getting dumped into the market, and the new RTX cards are overpriced and not selling well."

"I don"t understand how anyone can justify buying NVDA at 8x sales when the company itself told you they will be working through inventory issues for at least a quarter, maybe more," said Anderson Investing. "8x sales for a semi stock is a crazy high valuation."

For the most part, the bullish comments were more enthusiastic than the articles, as most bullish authors recommended waiting for an entry point, while many commenters said they were buying now. There appear to be very few actual shorts among the Seeking Alpha readership. Or maybe they"re just being silent?

Bull or bear? What are your views on Nvidia?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.