Making the Bear Case for NVIDIA

When a company is trading at a trailing earnings multiple of over 30, there is no room for error. NVIDIA (NVDA), which has been trading at over 30x P/E ratio, has surprised the entire market and has sustained its strong growth throughout the last 12 months. Due to the strong surge in stock price, NVIDIA’s price to earnings ratio has now surged to almost 40.

NVIDIA recently reported its first quarter earnings results. The company’s year over year revenue growth carried on to accelerate, surging 13 percent to $1.3 billion.
GPU business escalated 15 percent to $1.08 billion as compared to a year ago period, and Tegra processor business surged 10 percent to $160 million.

Two months earlier, NVIDIA launched its new Pascal architecture grounded on 16-nanometer FinFET process. With the help of Pascal architecture, the company will be able to extend its leading position across its specialized platform such as gaming, datacenter, automotive, and professional visualization. In the first quarter, these four platforms accounted for around 87 percent of overall NVIDIA’s revenue, a surge of 6 percent from a year earlier.

NVIDIA is aggressively focused on virtual reality platform. However, the company is facing some problems like there are presently less than 1 percent of PCs that support virtual reality from devices such as Oculus Rift and HTC Vive. That is a dreadfully low percentage and displays that it may take a long time for the company to generate a considerable amount of revenue from the virtual reality market.

The company detailed that a virtual reality supported PC should be approximately 5 times more powerful than an existing normal PC to handle the complex virtual reality graphics. However, NVIDIA is presently working with around 100 PC manufacturers to convey virtual reality ready PCs to market. Since there isn't a lot of PCs available in the market that supports virtual reality, stockholders will have to wait till the time VR related GPUs sales start adding substantially to the company’s bottom line making it a long term pick.

Recently, AnandTech unveiled leaked specifications of NVIDIA’s upcoming GeForce GTX 1080 Ti and next-generation Titan graphics card. However, they are not sure that the specifications are exactly true. However, if AnandTech is correct about the NVIDIA’s upcoming GTX 1080 Ti and Titan card, it is highly likely that NVIDIA can snatch rest of the market share from its foremost rival Advanced Micro Devices.

That being said, NVIDIA will have to wait a long time before it can harness the potential of the VR market. Given NVIDIA’s valuation, it will be very difficult for the stock to continue trading at 40x earnings. While I think NVIDIA is still a great company run by a very efficient management, the stock has peaked, at least for the short-term. NVIDIA’s risk/reward profile is now unattractive and I think investors should sell the stock after recording such terrific gains.
Published on Jun 1, 2016
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

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