Thursday, February 23, 2017

"Nvidia Drops 9%: Stock’s Valuation ‘Unsustainable,’ Says Instinet" (NVDA)

From Barron's Tech Trader Daily:
Shares of graphics chip pioneer Nvidia (NVDA) are down $10.09, or 9%, at $100.67, after Instinet’s Romit Shah cut his rating on the shares to “Reduce” from Buy, and cut his price target to $90 from $100, writing that the stock is as expensive as it’s been in the last ten years, and that investor enthusiasm for its newer offerings, in cloud computing and automotive, can be fickle.

He advises investors rotate into shares of Intel (INTC), whose stock he continues to rate a Buy.
“We believe adoption of Nvidia’s technology in the datacenter (artificial intelligence) and automotive (self-driving cars) primarily drove multiple expansion,” writes Shah.

“We believe datacenter and automotive will be solid long-term growth drivers,” he continues, “but the implied value that the market is ascribing to these emerging businesses is unsustainable.”
The stock has risen to a ten-year high in valuation relative to the broader chip field, he writes:

NVDA’s multiple averaged 2x enterprise value to sales or 0.7x our semiconductor coverage universe over the last 10 years; however, during the last twelve months, the multiple increased from 2x (0.9x coverage) to 7x (1.8x coverage). The current multiple represents a 10- year peak both on an absolute and relative basis to the group.

Moreover, the company’s $68 billion in market cap embeds an even higher multiple for the newer businesses, if one puts an appropriate multiple on the company’s chips for gaming PCs:

As such, we assigned a multiple of 5x EV/sales, in line with other leading franchises including ASML, TXN, ADI, INTC, and AVGO. Based on this multiple, we estimate the Core franchise is worth $30bn.  This implies that the market is valuing the Datacenter and Automotive businesses at $37bn or ~20x sales as shown in Figure 1. This is well in excess of comps in datacenter (AMZN, FB, GOOGL), automotive (TSLA, MBLY), and software (CHKP, PFPT, WDAY) that trade at less than 10x EV/sales with the exception of Mobileye....

We'll be back after the close, $100.23 down $10.53 (-9.51%)