Is NVDA stock worth just $90 a share? Or are the fears overdone?
Shares of Nvidia (NSDQ:NVDA) tumbled nearly 7% yesterday, after a bearish call by famed short seller Citron Research, which said that "NVDA Belongs At $90". Citron, headed by Andrew Left, has built a reputation for "unleashing eye-catching claims against companies that send their shares tanking", as Antoine Gara of Forbes puts it. Citron's claims have in the past unleashed the markets' wrath on stocks like Valeant (NYSE:VRX) and Facebook (NSDQ:FB), among others, and the impact on Nvidia seems to have been no different.
Citron's claims aren't without backing, although, as in most cases, some may agree, while others may not. The firm listed 6 reasons why Nvidia looks set for relatively tougher times ahead. Interestingly though, the report by Citron pegs the value of NVDA stock at $90 a share, implying a ~17% downside, even after yesterday's sharp fall. Is NVDA stock due for further correction?
Is NVDA Stock Headed To $90?
Nvidia's Growth, Market Share And Grip On Data Center And AI
To back its thesis, Citron has listed down six main reasons. Let's look at each of them. The first concern is around Nvidia's growth, which Citron believes has come largely on the back of market share gains, at the expense of AMD, in the gaming space as opposed to a new addressable market. Given AMD's recent progress, and the fact that it's latest line up of Vega GPUs are expected to outshine Nvidia's GPUs, the concern is probably valid in part. More so because Nvidia still generates about 62% of its revenue from its stronghold in the gaming space. (Also See: The Next Billion Dollar Opportunity For Nvidia)
AMD is also making progress in other segments, such as data centers and deep learning, which were almost completely dominated by Nvidia (between the two companies) until now. So, it's probably fair to assume that Nvidia will find it tough to gain significantly higher GPU market share by eating into AMD's piece of the pie. However, in most cases like data centers, AI, VR and self driving cars, the market itself is growing at a healthy clip, and Nvidia has thus far led the race by a huge margin. So, even if that equation changes, with AMD gaining a foothold in these sectors, the sheer growth in market itself is likely to drive Nvidia's growth, even if by a lesser degree. In essence, what Citron has pointed out is indeed a threat, but it's unlikely to choke Nvidia's growth. What we've discussed here also covers Citron's second concern around the growing competition in the data centers space.
AMD's Threat To Nvidia's Licensing Deal With Intel
Moving on to points numbered 3 and 4 in Citron's list, these points raise concerns around Intel's access to Nvidia's IP via a licensing deal, and the potential loss of revenue from this stream when the deal ends in March 2017. As we discussed in a detailed post on this topic recently, the deal with Nvidia cost Intel (NSDQ:INTC) $1.5 billion, spread over close to 6 years. And it does seem very likely that Intel will turn to AMD once the deal expires in March 2017.
Viewed in the backdrop of Nvidia's fast growing revenue base of over $6 billion in the last 4 quarters, that might not seem like much. Given the high margin nature of licensing revenue streams though, it might basically take that Dollar amount straight out of the bottom line, which is what Citron fears as well. If you base your estimate on Nvidia's LTM EBITDA (Last Twelve Months Earnings Before Interest Taxes Depreciation and Amortization) of about $1.4 billion, the impact could be as high as 17%. Do note, this calculation doesn't factor in the expected growth in EBITDA in the coming years. So, the impact is likely to reduce with each passing year. However, as is evident, the likely impact isn't negligible by any means. (Also See: Will NVIDIA Corporation (NVDA) Stock Continue To Surge Higher In 2017?)
Intel Set To Enter The AI Space In A Big Way
Probably the biggest threat to Nvidia's rosy outlook is Intel's counterattack in fast emerging markets like AI. While Intel has almost entirely dominated the data center processor market, it has ceded the AI space to Nvidia, whose graphics cards power a good chunk of deep learning neural networks. However, Intel is pushing back hard. Intel's claim is that GPUs aren't a sustainable solution to the computing requirements of deep learning. Intel claims, "The market is still nascent, so the current implementations are small enough that they could use GPUs, but it won't scale in the future." And to substantiate these claims, Intel has a partnership with Baidu to show for. It's worth noting that Baidu has been a heavy user of Nvidia's GPUs to power its deep learning models.
Even in terms of the financial impact, Citron's fears aren't baseless:
"NVDA is a fabless producer, with TSMC making all of its GPUs. Intel, on the other hand, is vertically integrated. TSMC makes a 50% gross margin on NVDA's business, to which NVDA adds another 80% gross margin of its own. Intel could charge 37% less for its chips and still generate 80% gross margins."
Much of Nvidia's bullish narrative has been built around these emerging sectors. And if Intel or any other competitor for that matter can puncture that thesis, Nvidia won't look as enticing anymore.
Summing It Up
Whether NVDA stock belongs at $90 or not, some of Citron's concerns are worth taking note of. The recent surge in NVDA stock has been fueled at large by an increasing number of bullish calls by popular analysts. And it appears as if investors might have ignored the potential risks. We still think Nvidia is a good long term investment, as we've highlighted in most of our recent posts. However, the upside might not be as significant as some of the recent louder-by-the-day bullish calls might have suggested. In fact, there are still 3 key risks that need to be highlighted, and we'll look to do that in our upcoming post.
For now, Nvidia looks like it's headed for further correction, and that theory is also supported by technicals like the Bollinger Bands, and the RSI. Long term investors could use these dips to accumulate shares of Nvidia. However, it might be prudent to temper down the expectations, at least a tad bit.
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