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Alex Cho

Nomura Downgrades Nvidia and Reduces Price Target to $90

Nomura downgraded NVDA to “reduce”, which means “equal weight” or “hold” in terms of Wall Street lingo, but basically, the analysts are concerned over valuation, as it’s trending substantial higher than industry peer comps on an EV/Sales and forward multiple basis. Romit Shah, reduced his $100 price target to $90, and while his estimates seem somewhat conservative when compared to analyst cons. it’s worth noting that the sell-side very rarely downgrades, so it’s worth examining the counter argument even if it differs materially from the remaining held view.

Furthermore, I want to note that if comp. acceleration were not to occur in the following call, or guidance is revised towards the mid-end of cons. estimates for 2H’17, the consensus view would shift downwards creating some negative pressure on shares.

Though, I’m hesitant to jump onboard the downgrade train with regards to NVDA it’s worth noting that the stock is trading at record levels, and it would make sense to take some winnings and move to the sidelines until there’s materialization of sustained rev. comp improvements in the auto/datacenter space that exceeds estimates. Though, waiting for such confirmation would diminish the upside from such an event, it’s also worth noting that the shares have moved considerably higher over 2016. It has become more difficult to identify an easily identifiable catalyst that could drive shares meaningfully higher.

That being the case, I wanted to highlight some of the most relevant comments from the Nomura Research Report:

We are downgrading Nvidia from Buy to Reduce and lowering our target price from $100 to $90. We believe consensus is underappreciating a slowdown in gaming and the potential negative impact to the multiple. NVDA’s multiple averaged 2x enterprise value to sales or 0.7x our semiconductor coverage universe over the last 10 years; however, during the last twelve months, the multiple increased from 2x (0.9x coverage) to 7x (1.8x coverage). The current multiple represents a 10-year peak both on an absolute and relative basis to the peer group.

In summary, we believe the company talked down the July period by characterizing normal seasonality as down low- to mid-single digits, versus a 5-year median of 2% growth. From our perspective, Nvidia’s outlook is not without merit. And yet consensus appears dismissive, forecasting July revenues flattish sequentially.

I believe the arguments mentioned by Nomura seemed fairly reasonable, and could spark a sequence of analysts reverting lower in their back-half estimates for FY’17. Furthermore, concerns over valuation seem reasonable, despite well-supported evidence of ramping datacenter and auto graphics revenue. While, the focus has been on these growth areas, I’m also concerned by heightened competition in the consumer graphics segment, and the lack of mid-year refresh for high-end graphics units beyond just a gradual progression towards higher-end GPUs that don’t contribute meaningfully to volumes.

I’m not assigning a rating revision here, but just echoing some of the concerns other FAs are making. Investors should really re-examine the risk/reward here.

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