The optimism around Nvidia may be overdone right now. Tread cautiously with Nvidia stock in 2017 at prices above $100.
NVIDIA (NASDAQ:NVDA) had an excellent 2016 surpassing $117 a share on the 27th of December. However, due to the end of year profit-taking or worrying trends that look to be on the cards in 2017, investors aggressively took profits at the back end of last year. At CES 2017, CEO Jen-Hsun Huang went through the company's achievements to date but also outlined where the company sees robust growth over the next few years. Autonomous cars, the video game market, and artificial intelligence are the prime areas that will drive this company forward.
In fact, the self-driving cars market looks particularly appealing to Nvidia investors, especially when you take note of the partnerships the company has already entered into. Nvidia finishes its fiscal year at the end of January, and earnings of $2.45 a share are expected on revenues of $6.84 billion. Margins (both operating & gross) continue to gain traction but the company's expected 2018 & 2019 average earnings growth is about 17%, which is much lower than this present fiscal year. Therefore, since growth stocks are usually priced to perfection, Nvidia will need to at least nail projections for its share price to keep climbing. I would be cautious getting long here since a lot of growth being priced into the stock already. Here are 3 worrying trends to back up my thesis.
Also Read: This Could Hurt Nvidia And AMD In 2017
Nvidia Is Not Diversified Enough To Become A True Growth Stock
This year the company is going to more than double its earnings, which is a feat Nvidia hasn't achieved for over a decade. Nvidia clearly wants to double down on its gaming business in order to increase market share. This is where bearish analysts have a problem with the company's earnings trajectory. For Nvidia to be a real proper growth stock, it just isn't diversified enough across multiple markets. The company used CES 2017 to announce the PC version of GE Force NOW which is a streaming service for dedicated video gamers. This endeavor is fraught with risk in my opinion for a number of reasons.
Steaming Gaming At Scale Will Be Hard To Pull Off
Firstly, the price seems very steep at $25 for 20 hours of play. This price point could, in fact, shrink the market which is not what Nvidia wants over time. Secondly, a sizeable chunk of company sales connected with the PC industry has to be a worry considering the lower trends of PC shipments we have been seeing over the past few years. Furthermore, streaming video games have to be so precise that a microsecond glitch could effect the user's game play. Moreover, the data centers on Nvidia's side along with the internet connection on the gamers side would have to be operating perfectly for GE Force NOW to work at top capacity. Not an easy feat in my opinion, which would make it a revenue source that would be difficult to scale. (Also See: Don't Buy NVIDIA Corporation (NVDA) Stock Just Yet)
AMD & Intel Will Come Roaring Back In The Data Center Chip Market In 2017
In this industry, it is rare to gain market share across multiple markets. In 2016 we definitely saw Nvidia gaining meaningful share in the gaming market which it predominantly took from AMD. However, AMD recently announced a new line of computer graphic cards which on the surface look very impressive and will look to regain lost market share from Nvidia in the data center machine learning segment. Although Data Center technology will continue to grow at breathtaking speeds going forward, I just don't see any strong competitive advantage for NVIDIA in this space which would keep competitors at bay. In fact, Intel and AMD are also coming out with their own high-end performance chips. This market is going to get extremely overcrowded in the near-term which won't do any favors for Nvidia's margins and revenue growth.
Investors Should Base An Investment Decision On Activity In The Self-Driving Space
With US stocks at all-time highs and with Nvidia trading with an earnings multiple of 52.9, I just think that the risk here on the downside is significant. Furthermore, although Nvidia has partnered with many car manufacturers, there is no guarantee that the company's technology will be used en masse in this area in the future. In fact, I don't see revenue coming from the self-driving division for at least two to three years. So, investors should in no way be basing an investment decision just on Nvidia's current partnerships. Again, I fail to see the long-term sustained competitive advantages in the automotive space, especially with so many tech companies (with far bigger research divisions) investing in this space at present.
Nvidia stock had a fantastic 2016, but I just feel that there is too much growth priced into the stock to warrant meaningful future gains. The company, in my opinion, will just have too much strong competition in areas such as data centers and automotive, for its margins and earnings growth to continue. With stocks at all-time highs, caution is warranted at present.
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