Shares of semiconductor giant Nvidia (NASDAQ:NVDA) and its peers have plunged this year due to macro pressures, the newly imposed controls on chip exports to China, and the weakness in demand in key end markets, like personal computers (PC) gaming. Nvidia stock has advanced 22.7% over the past one month, but is still down nearly 45% year-to-date.
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Nvidia Faces Near-Term Headwinds
Nvidia’s Q3 FY23 (ended October 30, 2022) revenue exceeded analysts’ estimates but earnings lagged expectations. Nonetheless, both the metrics declined on a year-over-year basis. Revenue fell 17% to $5.9 billion, while adjusted earnings per share declined 50% to $0.58.
Remote work, online education, and the rapid transition of enterprises to the cloud during the pandemic fueled strong demand for Nvidia’s graphics processing units (GPUs) that are used in PC gaming, data centers, and other applications. The company’s sales also gained from strong crypto-mining demand.
The demand in the PC gaming market has declined since the reopening of the economy. Also, the crypto winter has impacted Nvidia’s GPU sales. Furthermore, the Biden administration’s export controls on advanced chips added to Nvidia’s woes. In Q3 FY23, Nvidia’s Gaming revenue declined 51% to $1.6 billion. However, Data Center revenue grew 31% to $3.8 billion. Interestingly, Automotive and Embedded revenue surged 86% to $251 million.
Nvidia’s Q4 revenue is expected to remain under pressure due to continued weakness in gaming and China market.
What Are Analysts Saying About Nvidia Stock?
Following the results, Summit Insights analyst Kinngai Chan upgraded Nvidia to Buy from Hold. The analyst believes that Nvidia stock has a favorable risk-reward profile. Chan expects the company to benefit from tailwinds through next year, mainly fueled by its new product cycle.
J.P. Morgan analyst Harlan Sur feels that the near-term headwinds impacting Nvidia’s business are beginning to fade. The analyst believes that Nvidia is poised to witness accelerated growth next year. Sur reaffirmed a Buy rating on Nvidia stock and a price target of $220.
Overall, Wall Street’s Moderate Buy consensus rating for NVDA stock is based on 23 Buys versus eight Holds. The average Nvidia stock price target of $195.79 implies 20.3% upside potential.
Conclusion
Macro challenges and weak demand in certain end markets are expected to impact Nvidia’s revenue and earnings in Q4 FY23 and Q1 FY24. These headwinds could limit the upside in the stock over the near term. Furthermore, Nvidia’s forward P/E multiple (based on adjusted earnings) of 50.5x is considerably higher than the sector median of 19.3x.
That said, analysts expect Nvidia’s business to recover strongly from the second quarter of FY24. Most Wall Street analysts are looking beyond the near-term weakness and focusing on the robust long-term prospects for the company in data centers, automotive, and artificial intelligence (AI).
