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Bear of the Day: NVIDIA (NVDA)

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I can already see the crowds with their pitchforks and torches while I write this. Before I get into this discussion I want to make one thing perfectly clear; The Bear of the Day is not a recommendation to sell a stock. Rather, it’s meant to point out a particular stock which has seen bearish earnings estimates coming from analysts. It’s not an indictment on the long-term idea of ownership. I’m merely bringing to light issues that investors may not have been aware of. In other words, don’t kill the messenger.

Today’s Bear of the Day is none other than NVIDIA (NVDA - Free Report) . That’s right folks, the tech giant famous for graphics cards, chips for data centers, and autonomous driving tech. NVIDIA Corporation operates as a visual computing company worldwide. It operates through two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming and mainstream PCs; GeForce NOW for cloud-based game-streaming service; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for AI utilizing deep learning, accelerated computing, and general purpose computing; GRID provides power of NVIDIA graphics through the cloud and datacenters; DGX for AI scientists, researchers, and developers; and cryptocurrency-specific graphics processing units. The Tegra Processor segment provides processors designed to enable branded platforms - DRIVE and SHIELD; DRIVE automotive computers and software stacks, which offer self-driving capabilities; SHIELD devices and services designed for mobile-cloud in home entertainment, AI, and gaming applications; and Jetson TX 2, an AI computing platform for embedded use.

Ground zero here was the last earnings report. EPS came in just shy of expectations but that wasn’t the reason for the tailspin. You can chalk that up to the abysmal revenue guidance. Analysts were looking for revenues of $3.4 billion for next quarter. NVIDIA came out and guided at $2.7 billion. That’s a huge readjustment for analysts to make. This made for a brutal selloff in the stock and justifiably so. Investors had to readjust their growth expectations, thus changing the valuation model on the stock. Once willing to pay as much as 15.8x TTM sales, that multiple has now been reset to just 7.5x. To give you some perspective, the semiconductor industry average price to sales ratio is 3.3x. Granted, NVDA still enjoys a sales growth rate of 26% for the current year. That growth is expected to slow to 5.9% next year.

This caused a rush of earnings estimates to the downside. Eleven analysts cut their estimates for the current quarter, while twelve cut their numbers for next year. The bearish sentiment has sent the Zacks Consensus Estimate down from $2.03 to $1.41 for the current quarter while next year’s number has been cut from $8.73 to $7.11. It’s the main reason that the stock has dropped down to a Zacks Rank #5 (Strong Sell).

Management simply dropped the ball here. It’s not about missing the number, which is a whole other argument. This is about not managing expectations. Had they done a better job of communicating with analysts, they would have allowed them to adjust their models sooner. This would likely have led to a much softer landing for shares, rather than the downward death spiral they were put on following this disastrous report. It was so bad that it sent the entire NASDAQ down into the gutter along with it.

Investors looking for other stocks with a more favorable history of earnings estimate revisions should investigate NVDA competitor Intel INTC. Currently, Intel is a Zacks Rank #1 (Strong Buy). There are also several names which are Zacks Rank #3 (Hold) stocks within the same industry including STMicroelectronics STM.

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