NVIDIA stock has declined by more than 13%. Should you buy into the correction?
Short interest in NVIDIA Corporation (NSDQ:NVDA) stock saw a drastic fall in the latest round of reporting, indicating a decline in bearish sentiment around NVIDIA stock. This is the first time since the end of July that short interest in NVIDIA stock has seen any significant decline. The number of shorted shares fell by more than 23% from 71.4 million shares to 54.8 million shares, with short interest coming in at 10.8% of the float and days to cover at 2 days. Short interest has followed the stock price with the number of shorted shares shooting up from 44.44 million shares at the end of July to 71.4 million in mid-December, a rise of more than 60%.
The declining short interest indicates higher confidence in the stock which also has seen some correction. NVDA stock has fallen more than 13% from the 52-week high it hit on December 17th and is currently trading around its 20 day SMA support line. While a correction was round the corner as the stock had gained more than 30% since the beginning of December, what accentuated the correction was a bearish report from the short seller, Citron Research, which came out with a price target of $90 per share. With declining bearish sentiment, should you buy the stock after the correction?
Analysts are bullish
Citron remains in the minority. Most of the analyst community continues to remain bullish on NVIDIA stock. The company has a buy rating from Goldman Sachs with a price target of $130, an upside of just over 25% from the current level. Recently, the stock got price target upgrades from CitI, Jefferies and Concord Canaccord Genuity. The analyst community believes that NVIDIA has strong fundamentals and growth drivers. All its four divisions are showing strong growth. In the first three-quarters; revenue from Pro Viz division grew by 12%, gaming revenue grew by 35%, auto by 58% and data center revenues by a massive 121%.
Source: NVIDIA shareholders presentation
Strong Growth Drivers
Gaming is NVIDIA's largest segment, contributing almost 64% of the company's revenue, hence the fortunes of this segment are going to have a larger impact on NVDIA's top line than all the segments combined. The growth in this segment is likely to continue. The refresh cycle in gaming consoles and PC's will be a strong catalyst. The next generation of gaming consoles will double the GPU performance over the current generation leading to significant improvements in quality of games. Next generation games, in turn, will lead to increase in adoption of newer GPU's in the PCs. NVIDIA has more than 100 million GeForce users, out of which only 1/3rd have upgraded to Maxwell, NVIDIA's previous GPU architecture. NVIDIA has now started shipping GPU's based on its new Pascal architecture.
The company has also launched GeForce Now, a cloud-based gaming subscription service, during the CES 2017. This service will allow gamers to play for 20 hours for a fee of $25. This service will expand NVIDIA's market size as it will target those gamers who have an outdated or integrated version of the GPU's in their PC's, though there are some concerns around the pricing and bandwidth required to play the games on the cloud.
Another segment which will drive NVIDIA's future growth is autonomous car business. The company has been investing heavily in this segment. During CES 2017, NVIDIA and Audi announced that they will be launching advanced autonomous car by 2020. NVIDIA is partnering with more than 30 auto manufacturers for autonomous and connected cars. NVIDIA expects the autonomous segment to be a $6-$12 billion market. Jefferies analyst Mark Lipacis who has a price target of $125 on NVIDIA stock said:
"The increased pace of self-driving car announcements suggests that the competition between auto (manufacturers) to launch self-driving cars is heating up, and we expect more announcements between Nvidia and auto (makers) in 2017. Since Nvidia is the only company with a hardware and software neural-network platform for self-driving cars, we view the increased competition as being good for Nvidia."
Valuation Concerns Overdone?
But the massive rally in NVIDIA stock has also brought forth concerns regarding its valuations. The stock is currently trading at a PE (ttm) of 67.96 and a forward PE of 37.75. The company is trading at a Price to sales ratio of 9. Even after accounting for its strong growth, the stock remains expensive with a PEG ratio of 1.47. But there are many who feel that the concern around valuations is overdone. Canaccord Genuity analyst Matthew Ramsay who raised the price target to $120, an upside of 16% from current levels, believes that despite its current valuation concerns, the stock should remain as a part of your portfolio due to its compelling growth and margins. To quote him:
"Despite investor debates about stock valuation, we believe Nvidia is now a required core holding given compelling growth, strong margins and secular alignment with key multiyear themes of autonomous driving, gaming/VR and data center acceleration,"
NVIDIA stock still has room to go up and the recent correction provides an opportunity for investors to take a position in the stock. But investors must remain cautious. With stretched valuations, any miss on targets may lead to sharp corrections in NVDA stock.
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