Last week, Nvidia Corporation (NVDA – Research Report) looked like it was starting to recover from November’s slump. It was up $27 since bottoming out on January 3. And then the company dropped a bombshell on the markets – taking a leaf from Tim Cook’s book, Nvidia released revised guidance ahead of their next quarterly report, setting the bar lower in advance of the actual numbers. The share price plunged 18% in an immediate reaction.
What happened was, on Monday the company announced Q4 FY2019 sales guidance of $2.2 billion, significantly lower than the $2.7 billion Wall Street had been expecting. The lowered sales revenue numbers come after four months of declining stock prices, caused at least in part by the ongoing trade tensions between the US and China. The company particularly cited “deteriorating macroeconomic conditions, particularly in China” as a having a major impact on consumer demand for gaming GPUs.
Several of TipRanks’ top-rated analysts have updated their ratings on Nvidia since the guidance revision.
What the Analysts are Saying
Among the five-star analysts to update their reviews was Needham’s Rajvindra Gill (Track Record & Ratings), who downgraded the stock to a ‘Sell’ rating. Supporting his downgrade, Gill said, “While NVDA does not break out its specific Chinese gaming exposure, desktop gaming is hugely popular in China and a big market for NVDA. Deteriorating conditions in the Chinese economy have adversely affected purchases of graphics cards.”
Also downgrading NVDA was Joseph Moore (Track Record & Ratings), of Morgan Stanley. Moore lowered the stock to a ‘Hold,’ and said, “Missing the quarter this badly in gaming indicates more significant challenges than we had anticipated. This becomes a show me story…” In addition to his overall rating, Moore revised his price target down to $148, implying a 7% upside from Wednesday’s closing price of $137.
Nvidia has its boosters, too. In the last review after the new guidance, Jefferies analyst Mark Lipacis (Track Record & Ratings), #10 overall among TipRanks’ rated analysts, noted that “while the announcement was worse than expected, Nvidia benefits from secular trends in parallel processing.” He gives the stock a $185 price target, for an upside of 79%. Lipacis has a high success rate recommending NVDA shares, with an average return of 110%.
An Upgrade for NVDA
In a display of exuberance, UBS analyst Timothy Arcuri (Track Record & Ratings), and rated #32 in the TipRanks database, looked at Nvidia’s current situation and actually upgraded his rating on the stock, moving it from ‘Hold’ to ‘Buy.’ He justified his optimism in his comments, saying that the revised guidance and lower stock prices “finally set the stage for a new positive revision cycle starting this summer.” In line with his upbeat view, Arcuri gives NVDA a $180 price target and a 31% upside potential.
What Nvidia had to Say
This is not the first time that Nvidia has sought to clarify a reason for missing earnings. Back in November, in the Q3 earnings call, CEO Jensen Huang said “[The] crypto hangover lasted longer than we expected.”
Nvidia is highly sensitive to both Chinese and cryptocurrency markets. While the chipmaker offers products for a range of applications – including PC video games, supercomputers, and even self-driving cars – a demand decline in a major segment will impact the bottom line. China’s economy is slowing; even the CCP has had to admit that. Ebbing demand for gaming cards is simply one more confirmation of those “deteriorating macroeconomic conditions.”
Nvidia’s connection with crypto is less obvious. The long decline in the cryptomarkets has slowed down the coin mining operations that expand the blockchain ledgers and bring new coins into existence. The coin miners, needing powerful computer chips, have frequently turned to Nvidia’s graphics cards for computing capacity; that demand has dried up in recent months as demand for crypto has slowed.
All in all, CEO Huang summed up the current situation: “Q4 was an extraordinary, unusually turbulent, and disappointing quarter.”
A Ray of Hope
While the earnings revision is a grim addition to Nvidia’s current state, the company has realistic hope for better performance in the future. The prime product, graphics cards, are just the right fit for AI applications and machine learning; their ability to conduct multiple simple calculations at the same time ensures the company a receptive market among cloud data centers.
Returning to Jensen Huang, he finished his statements on an upbeat note: “Looking forward, we are confident in our strategies and growth drivers. The foundation of our business is strong and more evident than ever.”
Coming to Consensus
Overall, NVDA holds a ‘Moderate Buy’ rating on the analyst consensus. This rating is derived from 31 recent reviews, including 21 ‘buys,’ 9 ‘holds,’ and 1 ‘sell.’ The average price target is $190, for an upside potential of 38%.
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