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Nvidia’s (NASDAQ:NVDA) protracted descent has wiped out close to half of its market value since peaking in November. The market leader in graphics and AI processors has recently become a fallen victim of the bears, as its stock value struggles to “fight a deteriorating macro environment” despite robust fundamentals that have outperformed most under tightening economic conditions.

But considering Nvidia’s continued prowess and market leadership in graphics cards and artificial intelligence ahead of a bullish demand environment bolstered by the rapid acceleration of digitization across industries, its growth prospects remain strong. As discussed in our previous coverage, the near-term inconsistencies between Nvidia’s recent stock price declines and its continued fundamental outperformance is but a byproduct of ongoing macroeconomic challenges. The Nvidia stock remains on a positive track towards further upsides over the longer-term given the structural importance of the company’s technologies in enabling core digitization trends over the coming decade and beyond.

Why Has Nvidia Stock Gone Down?

Selloff risks are “becoming more broad-based“, with high valuation and consumer-reliant stocks being most vulnerable to investors’ unforgiving hand when it comes to abandoning positions at the first sign of weakness. A prime example would be semiconductor industry leader Intel’s post-earnings dip on disappointing results released in late April, stemming from a softening PC market, which sent its shares on an intraday plunge of more than 7%. It also dragged already-battered industry peers along on the descent, with the broader Philadelphia Semiconductor Index plunging as much as 5% on the same day.

Persistent price pressures are also adding volatility to markets. The latest inflation print for April, which came in hotter than expected, had further whipsawed the semiconductor peer group’s performance, along with the Nvidia stock. Investors are now bracing for more aggressive Fed rate hikes in response, which threaten to erode the value of future cash flows from high-growth tech companies while also potentially “sending the economy into a recession”. While Fed Chair Jerome Powell had noted in his commentary following the May FOMC meeting that the current plan is to increase rates by 50 bps increments coming June and July, with a 75 bps hike “not something that the committee is actively considering”, traders are now raising bets the Fed will roll out another half point interest rate increase in September to get a grip on runaway price pressures.

As further volatility awaits ahead of a Fed interest rate increase by “at least another 150 bps this year”, with no prospects yet of a resolution to ongoing inflation drivers such as the Russia-Ukraine war and COVID lockdowns in China, it could take until at least after September when Nvidia’s fundamental strength can regain dominance from the current market rout. In the meantime, the “stock market [remains] priced for perfection”, and meeting or exceeding market expectations on earnings performance would be key to avoiding steep valuation declines. As such, continued fundamental outperformance will be crucial to bolstering a strong turnaround for the Nvidia stock once the current market storm subsides.

A Deeper Dive into Some of Nvidia’s Downside Risks

While Nvidia continues to boast best-in-class GPU and AI technologies that combine hardware and software offerings to enable full-stack end-to-end solutions for customers and maximize market share, it is not completely free from downside risks. These span from rising competition to cyclical headwinds such as a softening PC market. It also remains a victim of ongoing supply chain constraints, which are driving a vicious cycle of declines in auto uptake.

1. Increasing Competition on its Own Turf

Although Nvidia currently commands more than 80% of the data center GPU market share, it is starting to face stiff competition from rival chipmakers that are trying to penetrate its dominance. Recognizing the rapid surge in chip demand from data centers, AMD (AMD) and Intel have been stepping up on their GPU capabilities in recent years to ensure competitiveness in the fast-evolving industry.

AMD, which specializes in data center CPUs, has recently launched the second generation of complementary data center GPUs featuring the “CDNA 2” architecture. The CDNA 2 architecture currently facilitates AMD’s all-new “AMD Instinct MI210” data center GPU and “ROCm 5” open software platform designed for “exoscale-class, high-performance computing (“HPC”), and AI applications”, which is sufficient to put industry leader Nvidia on notice. The newest development fuels direct competition with current data center GPU market leader Nvidia over coming years as demand from the sector accelerates. The CDNA 2 architecture delivers more than two-times the performance of its predecessor by enabling integration with AMD’s server CPU chips, making it a competitive offering in addressing HPC, hyperscale data center and AI workloads. As mentioned in one of our previous coverages on the stock, AMD has drawn increased prominence within the HPC realm in recent years – its processors can now be found in 73 supercomputers on the latest TOP500 list and holds 70 HPC world records. The latest improvements to AMD’s data center CPU/GPU portfolio, paired with added technological strength from the recent acquisition of Xilinx are expected to further fuel its reputation across HPC and AI applications, which stokes tougher competition ahead for Nvidia.

Intel is also preparing for the fast-approaching roll out of a new slate of data center GPUs designed to “challenge Nvidia on its own turf”. The legacy semiconductor titan has recently announced a revamped product line-up that will include “updated AI chips, fresh versions of [the] Xeon processors and semiconductors that help connect telecommunications networks”. Intel will be rolling out its second-generation Habana Gaudi and Greco AI chips that are “used to train and then run AI software as it makes decisions based on the data it receives”. Aimed at better positioning its AI strengths against Nvidia’s, Intel’s updated Habana AI processors are designed to “deliver twice the training throughput over the Nvidia A100-80GB GPU“. The company will also be “selling two versions of a [data center graphics processor] called Artic Sound starting in the third quarter”, which have been specifically designed to address the workload requirements of “cloud gaming, media processing and delivery, virtual desktop infrastructure, and inference tasks”.

But these competing developments have not caught Nvidia off guard. Its latest launch of the “Hopper” architecture, which succeeds “Ampere“, was a highlight of its annual GTC 2022 keynote event, and an answer to recent rival developments that seek to dethrone Nvidia’s prowess in the field. Designed with the specific need to address performance requirements for increasingly demanding workloads in mind, the “next-generation accelerating computing platform” aims at bolstering Nvidia’s technological leadership in data center GPUs. The first “Hopper-based GPU”, “NVIDIA H100“, is capable of “advancing gigantic AI language models, deep recommender systems, genomics and complex digital twins”. Built on TSMC’s (TSM) newest 4-nanometer process, the H100 is expected to be “the world’s largest and most powerful accelerator” for HPC application – 20 H100 GPUs would be sufficient to sustain the entire world’s internet traffic, underscoring Nvidia’s powerful influence over AI-computing.

Nvidia has also recently announced its foray into data center CPUs, which seeks to disrupt the market leadership currently held by AMD and Intel. NVIDIA introduced “NVIDIA Grace CPU Superchip” at GTC 2022. Built to deliver significant “performance leap for systems training giant AI models”, the Grace CPU Superchip will enable “twice the memory bandwidth and energy-efficiency compared to today’s leading server chips”. The Grace CPU Superchip also implements Nvidia’s newest “NVLink” technology, which enables seamless linking and communication between two CPU chips connected through “NVLink-C2C” to enable industry-leading performance that is at least 1.5x higher compared to its existing Ampere-based processors shipped today.

The Grace CPU Superchip is also built to complement Hopper-based GPUs like the H100 described above. Together, the system is expected to catapult NVIDIA’s new foray into data center server CPUs and bolster its competition against reputable players in the field that include AMD and Intel. NVIDIA is already working with “leading HPC, supercomputing, hyperscale and cloud customers” for implementation of the Grace CPU Superchip, which is expected to be deployed in the first half of 2023.

2. Slowing Gaming Industry and Overall Softening in the PC Market

Overall PC and gaming demand have come down from peak acceleration observed during the pandemic when many were subjected to mobility restrictions under strict COVID lockdowns and social distancing measures. The trends were echoed by game developers and related service providers such as Electronic Arts (EA), Roblox (RBLX), and Sony (SONY), which have all observed some form of decline in time spent by users on gaming platforms and/or subscriptions to cloud-based game passes.

Consumer PC demand has also softened since the peak pandemic-era when individuals across all demographics were scrambling for a computing device to accommodate remote working and learning needs. As mentioned in earlier sections, Intel saw its PC chip sales decline in the first quarter after some customers “cut orders to reduce unsold inventory and consumers bought fewer devices for education purposes, …escalating concern that overall demand for consumer PCs is sputtering following a boom fueled by pandemic-related working and studying needs”.

With gaming revenues representing close to half of Nvidia’s total annual sales mix, the current market trends definitely make a sore spot at first glance. But a deeper look would reveal that Nvidia’s continued development of next-generation graphics processors for PC application incorporates best-in-class technologies that include “Deep Learning Super Sampling” (“DLSS”), ray-tracing capabilities, and “Max-Q” to further appeal beyond the softening consumer PC and gaming markets.

For instance, Nvidia’s newest suite of Ampere-based RTX GPUs incorporates Max-Q technology, an AI-based system that enables thinner and lighter laptops without compromising on performance. The upgraded Ampere-based RTX GPUs will be deployed through a new series of “NVIDIA Studio Laptops“, which will be capable of “handling the most challenging 3D and video workloads, with up to double the rendering performance” of its predecessors. This accordingly bolsters its appeal to commercial demand stemming from creative professionals like developers and video creators looking for computing power that can handle demanding workloads without compromising performance. Paired with a suite of complementing Studio software, including “Studio Driver“, “Omniverse“, “Canvas“, and “Broadcast“, Nvidia’s latest development in PC-based GPUs is expected to further propel the current upgrade cycle driving its core gaming segment sales for years to come.

3. Slower-Than-Expected Auto Take-Off

The first three months of the year have largely remained a struggle across the broader automotive industry, as OEMs continue to take the brunt of the blow from protracted supply chain snarls ranging from component shortages to logistics headwinds. The pandemic-era disruptions to supply chains have yet to even recover, and the war in Ukraine and renewed COVID lockdowns in China have already unleashed fresh pressure on the already-fragile imbalance between input supply and demand.

As discussed in our recent coverage, Nvidia’s automotive segment sales will remain impacted in the first half of the fiscal year as auto production output remains constrained. But the situation is expected to show accelerated improvement soon, as some automakers have already expressed that the “worst of the [semiconductor] shortage has passed” during the latest earnings season. And over the longer term, Nvidia’s full-stack autonomous driving solution offerings (“NVIDIA DRIVE“) will benefit from continued development and rapid adoption of self-driving technology. NVIDIA’s increasing focus on satisfying automotive technology demands with its AI prowess in recent years comes at an opportune time. The sector is expected to advance at a rapid pace, with demand for autonomous driving software expected to grow at a compounded annual growth rate (“CAGR”) of 36% over the next five years and into a $60 billion opportunity by the next decade. This makes strong tailwinds for Nvidia, which seeks to grab a meaningful market share of the burgeoning industry with its ecosystem of new and improving automotive offerings once the automotive supply snags subside.

Spanning Omniverse solutions that include “NVIDIA DRIVE Sim” and “NVIDIA DRIVE Map“, to hardware offerings like the “NVIDIA DRIVE Orin” chip and the comprehensive “NVIDIA DRIVE Hyperion 8” sensor suite, as well as accompanying software applications like “NVIDIA DRIVE IX“, Nvidia empowers the full-stack development of autonomous mobility technology from training to deployment. The combination of software and hardware offerings accordingly maximizes Nvidia’s addressable market, and bolsters its reach into emerging growth opportunities stemming from a variety of use cases that range from OEMs and robotaxi fleets to pure autonomous driving technology providers.

To date, Nvidia’s AI-based automotive hardware and software offerings have already secured a robust pipeline of partnerships that together represent an order book valued at more than $11 billion. The recent achievements are a testament to Nvidia’s critical role in enabling the next generation of “software-defined vehicles” and corroborates a massive runway for additional automotive revenue growth over the longer term. Nvidia’s automotive segment revenues are expected to ramp up once industry-wide supply chain constraints start to ease and improve in the latter half of the year, as adoption for advanced self-driving technology approaches an inflection point.

Is Nvidia Stock Expected to Rise Again?

Despite the near-term downside risks facing Nvidia’s operations, in addition to broader macroeconomic headwinds that continue to pose a challenge over the semiconductor peer group’s valuations, the foregoing analysis underscores the chipmaker’s positive track towards a consistent showing of strong earnings. Buoyed by the combination of a robust demand environment and Nvidia’s technological prowess, the anticipated continuation of its financial outperformance is expected to put investors’ focus back on strong fundamentals.

Although tightening financial conditions are fanning fears of a slowdown in consumption, “spending on technology remains robust”. Data centers have become an essential for cloud-based solutions that complement AI to “make sense of the flood of data created by smartphones and internet applications” in today’s digital world. And with chipmakers like Nvidia being the backbone of this technology, the overall demand environment remains strong and growing.

More than half of the commercial sector have expressed that they would rather “tighten the belt” in other parts of the business than to miss out on digital transformation, which is considered a strategic investment in differentiating themselves from competitors, while also enabling cost efficiencies. With only 11% of the corporate landscape feeling confident that their legacy business models will be “economically viable through 2023” and another 64% raising the need to step up on digitization plans, corporate spending on digital transformation is expected to further bolster Nvidia’s momentum from a fundamental standpoint.

Nvidia Financial Forecast (Author)

Note: Please see here for further detail on growth assumptions applied.

But the situation on the valuations front is comparatively dire. Since our mid-April coverage on Nvidia, the broader semiconductor peer group’s valuations have compressed further despite a relatively strong earnings season. More than 80% of constituents within the S&P 500 that have reported actual 1Q22 financial results to date have beat earnings expectations, surpassing the five-year average of 77%. But investors remain on edge given the cold reality of a potential recession with inflation still at a 40-year-high and an increasingly hawkish Fed, amongst other looming geopolitical and pandemic-related threats to the global economic outlook.

The valuation premium in which Nvidia had previously benefited from over its peer group has largely diminished as the market rout that began in November of last year continues with no respite. But considering the company’s fundamental strength, which is expected to have continued through its latest fiscal quarter ended late April / early May considering the robust demand environment observed across peers like AMD and Qualcomm (QCOM), the Nvidia stock will at least remain insulated from an extended selloff due to company-specific weakness.

Nonetheless, as broad-based market volatility and multiple compression continues due to tightening market conditions stemming from a blight of macroeconomic headwinds, which have particularly weighed on growth stocks like Nvidia that were previously trading at lofty valuations, the stock could see further declines in the near-term. While we remain confident that Nvidia could become a $400 stock over the longer-term as it penetrates new markets under the bullish demand environment with continuous technological innovations, it might have to continue as a victim to the broad-based market rout for a while longer. Between now and when inflation starts to show structural improvement to corroborate that the Fed’s policy tightening measures are working and supply chain bottlenecks are being resolved, volatility will remain the theme.

Is Nvidia Stock a Buy, Sell or Hold?

Considering Nvidia’s diversified product portfolio and market dominance within a bullish demand environment fueled by continued digitization trends, the company remains well-positioned for accretive fundamental growth that commands further valuation upsides ahead. Nvidia remains the backbone of critical next-generation digitization trends, while also enabling new innovations to unlock sustained growth opportunities over the longer-term.

Although the mismatch between Nvidia’s fundamental and valuation performance is expected to continue over coming months as macroeconomic challenges remain fluid, we expect the former to prevail over the longer-term. We do not consider the current selloff of the Nvidia stock a structural representation of its intrinsic value. Its fundamental outperformance is expected to lead the stock towards restored momentum once the transitory macro headwinds subside.