Nvidia Targets Slashed, Outlook Sparks Worst Day in a Decade
Comment of the Day

November 16 2018

Commentary by Eoin Treacy

Nvidia Targets Slashed, Outlook Sparks Worst Day in a Decade

This article by Ryan Vlastelica for Bloomberg may be of interest to subscribers. Here is a section:

Goldman removed Nvidia from its conviction list, writing that it had underestimated both a channel inventory build and a correction in the company’s gaming division.

“While we view the inventory correction in Gaming as a one-time reset as opposed to a change in the long-term growth profile, we believe it could take a few quarters before the market regains confidence in the growth trajectory of the business, especially given the weak economic backdrop.”

Goldman maintains its buy rating, writing that Nvidia still “has access to one of the best growth opportunity sets in Semis,” along with a “sustainable competitive lead.” but cuts its price target to $200 from $283. The average price target is around $239, according to data compiled by Bloomberg.

Eoin Treacy's view

Nvidia was the best performing share on the Nasdaq in both 2016 and 2017 but the impressively steep trend began to lose consistency at the beginning of this year when breaks failed to be sustained. That suggested the vacuum of supply above the range, necessary for breakouts to occur, was not forming. The break below the trend mean ended the medium-term uptrend and the decline has been unrelenting since.

Semiconductors tend to be cyclical businesses because they perform well when the inventory cycle rolls over into a new replacement phase and when new sources of demand arise. Cryptocurrency mining for example was a substantial demand growth driver for the company in 2016 and 2017 and has been written down to zero this year. Meanwhile the banning of new games by China is a headwind for new graphics chips demand. Perhaps the biggest question is on the continued growth of the cloud sector. Data centre growth has been one of the primary drivers behind the semiconductors sector and its continued success will be instrumental in the fortunes of the sector.

The First Trust Cloud Computing ETF continues to outperform the Nasdaq-100. It is currently ranging, mostly above, the March peak and needs to hold the $50 if the trend is to remain reasonable consistent.

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