In recent times, the Nvidia (NVDA) growth story has come under pressure due to a sharp decline of its gaming revenue – the segment which traditionally had been the main breadwinner.
For Morgan Stanley’s Joseph Moore, “derisking” the gaming numbers has been of vital importance. So, guidance for revenues showing a 60% decline in 2 quarters “certainly does that,” says the 5-star analyst who also expects the October quarter to be the bottom for the segment whilst anticipating a “fairly sharp rebound in gaming starting as soon as the January quarter, with a new product boost.”
Meanwhile, while gaming sales have hit the skids, Nvidia’s data center segment has been able to pick up the slack and has now surpassed it to become the main revenue generator. However, Moore also now sees some worrying in trends in this part of Nvidia’s business.
The persistent “sluggishness” in data center, says the analyst, comes as a bit of a surprise because most external checks and management's commentary on demand would indicate that business is doing fine. However, the fact that the company has experienced low single digit growth for the past two quarters (including the October guide) and the fact that data center demand concerns were specifically mentioned in the recent inventory writedown make Moore cautious.
“We would be nibbling at the stock on any weakness here, but with the material multiple expansion as numbers have come down and the stock has recovered, we need some dust to clear around this data center situation to justify large upside from here,” Moore expounded on the issue. “But without visibility into what is holding back the data center growth rates, its hard to argue for enough upside to move to Overweight (i.e., Buy), for now, particularly given our view that higher multiples will remain under pressure in the current macro/rate environment.”
Accordingly, Moore rates NVDA an Equal-weight (i.e. Neutral) along with a $182 price target. (To watch Moore’s track record, click here)
6 other analysts join Moore on the sidelines, although they are countered by 23 positive reviews, which provide the stock with a Strong Buy consensus rating. The average price target stands at $215.18, making room for 12-month gains of 32%. (See Nvidia stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
The technology sector has taken a huge and painful hit over the past few quarters. Tech, once again, led the markets lower, with the Nasdaq 100 amplifying daily losses in the S&P 500. In this article, I used TipRanks' Comparison Tool to look at three large-cap tech stocks — NVDA, CRM, and ADBE — that may have the means to march higher from the market's latest mini-rut. While I would not fight the Fed, I would give the following Strong-Buy-rated tech stars a glance as the market recovery pulls the brakes.
Indeed, we've all been through this one before. Higher growth and higher valuation metrics are viewed in a more negative light, with rates rising. Rates on the 10-year Treasury note jumped quite a bit yesterday ahead of the Jackson Hole meeting. Investors no longer expect the hint of dovishness going into the meeting, which is why best-in-breed tech stocks may be a great option to consider following the latest pause in the market rally.
Many will doubt the sustainability of the lovely summer rally we've had. In any case, you cannot go wrong with the following Strong Buy-rated tech stocks that are well-equipped to continue powering forward despite higher rates and intensifying macro storm clouds.
Nvidia (NVDA)
Nvidia is a semiconductor powerhouse that may very well be the most exciting in the industry. Graphical hardware is the new frontier, with the metaverse and hyper-realistic video games on the horizon. It's not just good-looking games where Nvidia could make a splash, though. Its processing power is enough to unlock the next generation of AI and other intriguing technologies.
With such a large and growing total addressable market, it's hard not to remain excited, even as tech becomes a bit of a wreck.
Having a large total addressable market is fine and dandy, but you've got to have a management team capable of making the most of industry opportunities. With CEO Jensen Huang continuing to impress, I view Nvidia as a company that can show that it's worth a premium, even as rates rise and premier-valued tech stocks are no longer in demand.
Federal Reserve fears may drag NVDA stock lower over the near term. That said, Nvidia is ready to move on from the latest gaming slump as it looks to raise the bar for performance. Further, 2023 is a year that could hold a recession, but it's also one where the metaverse adoption could begin to take off. Once the demand for graphical hardware picks up again, Nvidia will be tough to stop in its tracks.
The stock trades at 45.1x trailing earnings. That's a high price to pay for a chip stock going into a downturn. Clearly, there's still a lot of optimism baked in. Regardless, Nvidia's pace of innovation is unlikely to slow.
Wall Street is a fan of Nvidia, and it's easy to see why. It's a best-in-breed company that can take share with its top-of-the-line offerings, and, of course, there are strong secular tailwinds. With 23 Buys and 7 Holds, Nvidia comes in as a Strong Buy. The average NVDA stock price target is $215.18, implying ~32% upside potential.
Salesforce (CRM)
Salesforce is an enterprise cloud kingpin, but shares have lost their way of late. CEO Marc Benioff has found a way to continue delivering exceptional quarterly results, a trend unlikely to die anytime soon.
A recession could weigh on IT spending. However, there's no evidence of a drastic downturn in Salesforce's results. Benioff views its business as resilient in the face of a recession. After a solid first quarter, I think it's hard to argue with the man. The digital transformation is ongoing, and a recession seems unlikely to stop it, given the value and cost savings associated with it.
Salesforce stock may not be recession-resilient, but it's probably mildly recession-resilient. The company may have paid up for Slack Technologies, but it's a strong foundation that makes Salesforce the king of work.
With exceptional stewardship and a knack for effective integration of deals (the firm recently bought Troops.ai to beef up Slack), investors are in very good hands as the lights go out on the tech scene.
Down around 47% from its high, I think CRM stock has been unfairly punished. Yes, the multiple is rich (175.6x trailing earnings), but let's be frank; it doesn't tell the whole story. Salesforce is fighting to improve its margins, and with that will come a steady jolt to earnings, all while sales growth remains elevated.
Finally, Salesforce is a behemoth that I think could take meaningful share away from other players in customer-relationship management (CRM). It's a cloud pioneer, and it's getting stronger every quarter. Though coming quarters may be weighed down by macro events, I do expect Salesforce will be among the first tech firms to rocket higher once volatility dies down and the new bull roars.
Wall Street loves Salesforce, with 27 Buys, four Holds, and one Sell. The 37% implied upside potential, based on CRM's average price target of $227.67, is also relatively high for the Strong-Buy-rated tech titan.
Adobe (ADBE)
Adobe is a creativity and enterprise software company that's down more than 45% from its high. Like Salesforce, Adobe has a strong presence in the cloud, with a growing lineup of intriguing offerings for digital marketers and advertisers.
Though Adobe clocked in decent Q2 results, beating expectations by just pennies, the full-year outlook is discouraging. Many macro headwinds could weigh down year-end results. However, I think it's a mistake to bet against CEO Shantanu Narayen. He's a great manager that can steady the ship amid increased choppiness.
Looking way ahead, I'd look for Adobe to have the tools for developers to create the digital worlds of tomorrow. Indeed, the creative cloud may be a preferred choice for those looking to create the digital experiences of tomorrow. Though metaverse hype has died down, one should not discount Adobe's role in the future digital worlds. Arguably, the metaverse is the ultimate medium to express creativity.
The firm's Substance 3D tool got some considerable updates in June. With more innovation to come, Adobe strikes me as a must-own in its moment of pain.
At 39.4 times trailing earnings, ADBE stock is still pricier than the market. Given its innovative talent, it deserves to be. Wall Street seems to agree, with a Strong Buy rating based on 17 Buys and just four Holds. However, ADBE's average price forecast of $458.67 implies just 11.5% upside potential, much less than the aforementioned stocks.
Conclusion: Analysts are Most Bullish on Salesforce Stock
There you have it. Three tech stocks that are down, but not out, according to Wall Street. Of the three stocks, Salesforce seems to have the most upside potential in the next year. Count me in, I'm a big fan of Salesforce going into its coming quarter.
Chipmaker stocks have certainly had their ups and downs over the years, but this year, they've been heading mostly down, creating the potential for investors to pick and choose the cream of the crop at a discount. In this piece, we used TipRanks' Comparison Tool to evaluate two popular semiconductor stocks -- Advanced Micro Devices (AMD) and NVIDIA (NVDA). A closer look reveals why AMD deserves a bullish view, while a bearish view may be more accurate for NVDA.
Advanced Micro Devices and NVIDIA have both benefited from cryptocurrency mining and other trends that drove increases in semiconductor sales.
Meanwhile, the semiconductor industry has had a difficult time since the early days of the pandemic as shortages squeezed supplies of everything from cars to smartphones and tablets.
However, the recently signed CHIPS and Science Act should give the chipmaking industry a boost. It's aimed at bolstering the semiconductor supply chain and promoting R&D on advanced technologies in the U.S. Some chipmakers are likely to benefit from this law more than others.
The State of the Semiconductor IndustryIn the U.S., one trend that's sure to drive growth in the chip industry is the CHIPS and Science Act. Unfortunately, neither AMD nor NVIDIA is expected to benefit from that law, which is aimed at driving domestic semiconductor production. Although both companies are based in the U.S. and design their own chips, they contract third-party companies like Samsung (GB: SMSN) and TSMC (TSM) to manufacture their semiconductors.
As a result, they can't benefit from the $52 billion the federal government has earmarked for companies to build new fabrication plants in the U.S. However, there are other effects to consider when looking at AMD and NVIDIA.
The pandemic opened a lot of people's eyes to the importance of computer chips. Many industries were put on hold due to the widespread shortages of semiconductors. Deloitte estimates that the global semiconductor industry will be worth about $600 billion this year.
The firm also estimates that chip shortages during the pandemic likely cost more than $500 billion in lost sales, including $210 billion in lost auto sales. Deloitte sees the trend line of semiconductor sales as "steeper than ever before as we enter a period of robust secular growth." As a result, there should be plenty of sales available to the chipmakers that take the necessary sales to attract them.
Advanced Micro DevicesOn that note, reviewing AMD's and NVIDIA's earnings results is very revealing. In Q2, AMD reported adjusted earnings of $1.05 per share on $6.55 billion in revenue. Analysts had been expecting earnings of $1.03 per share on $6.53 billion in revenue.
The chipmaker's total revenue rose 70% year-over-year on the back of growth in all segments and the addition of sales from the recent Xilinx acquisition.
As a result, the slowdown in crypto mining due to the Ethereum (ETH-USD) blockchain's switch from proof-of-work to proof-of-stake shouldn't drastically reduce AMD's sales.
It should also be noted that AMD's gross margin for the June quarter declined only two percentage points year-over-year to 46% -- despite this year's soaring inflation. The chipmaker's non-GAAP gross margin actually increased, rising six percentage points year-over-year to 54%. AMD also posted record non-GAAP operating income of $2 billion or 30% of revenue, a 24% increase year-over-year, and record non-GAAP net income of $1.7 billion.
There are other things to like about Advanced Micro Devices. For example, the company's cash and equivalents stood at $6 billion at the end of June, while debt was less than half of that at $2.8 billion. The chipmaker also repurchased $920 million in shares during the quarter and reported record cash from operations of $1.04 billion. Free cash flow rose to $906 million.
All in all, the Q2-earnings report was a strong showing, given macroeconomic challenges. However, AMD did disappoint with its guidance, as it expects $6.7 billion in sales for the current quarter, plus or minus $200 million. Analysts had been looking for $6.83 billion.
Additionally, AMD's P/E is low relative to its history at 40x. The chipmaker's P/E has been declining since it peaked at ~270x in January 2020. Although AMD's P/E is high compared to others, like Intel (INTC), the robust earnings and sales numbers suggest a premium could be warranted.
In fact, Hold-rated Intel has been struggling with execution, which is another reason AMD's numbers have been better than Intel's. With AMD shares down about 37% year-to-date due to the tech-focused sell-off, this could represent an attractive entry point.
Is AMD Stock a Buy?Turning to Wall Street, Advanced Micro Devices has a Moderate Buy consensus rating based on 19 Buy ratings, eight Hold ratings, and one Sell rating over the last three months. At $123.17, the average AMD price target implies upside potential of 35.1%.
NVIDIAAn analysis of NVIDIA's latest earnings report reveals general weakness compared to AMD. It certainly seems as if the economic slowdown and soaring inflation have taken a bigger bite out of NVIDIA's numbers.
The chipmaker reported adjusted earnings per share of $0.51 on $6.7 billion in revenue. Analysts had been expecting EPS of $0.50 on $6.7 billion in sales. While AMD's sales soared compared to last year, NVIDIA's revenue rose only 3%. Its gross margin fell 21.3 percentage points year-over-year, falling to 43.5%, compared to AMD's largely-stable gross margin.
While AMD posted several record numbers, NVIDIA reported declines virtually across the board. Non-GAAP net income fell 51% year-over-year to $1.3 billion, while adjusted operating income fell 57% year-over-year to $1.3 billion.
NVIDIA cited "challenging market conditions" in its Gaming segment for the earnings disappointments. The chipmaker also reported write-downs on some of its Data Center inventory, while AMD had reported an 83% year-over-year increase in sales from its Data Center business.
For the October quarter, NVIDIA guided for $5.9 billion in sales, plus or minus 2%. That compares to the consensus of $6.9 billion, a significantly larger disappointment than AMD's guidance.
With so many disappointments, NVIDIA surely deserves a lower P/E than AMD, but its ratio stands at 43.6X. In fact, the company's stock rose more than 1% the day after its most recent earnings report, although it's down 45% year-to-date.
Is It Good to Buy Nvidia Stock? Analysts Weigh InTurning to Wall Street, NVIDIA has a Strong Buy consensus rating based on 23 Buys, seven Holds, and zero Sell ratings over the last three months. At $215.18, the average NVIDIA price target implies upside potential of 32.3%.
Conclusion: AMD Looks Cheap Relative to NVIDIAAside from the P/E ratios and earnings numbers that make AMD look cheaper than NVDA, one other thing that should be considered when comparing the companies is AMD's acquisition of Chinese chipmaker Xilinx. It's unclear just how much that acquisition boosted the company's latest earnings results because it did not break down Xilinx's contributions.
However, Xilinx reported about $1 billion in sales for the quarter it reported in January. Thus, based on that amount, the chipmaker could have added about 37% of the sales increase AMD reported in the most recently completed quarter. If that estimate is accurate, then AMD is still growing organically on top of the Xilinx acquisition, although it's difficult to know just how much organic growth the company is enjoying.
At the end of the day, NVIDIA's higher P/E doesn't appear warranted when comparing the two chipmaker's earnings results. It seems many analysts may believe NVIDIA will have turned the corner by the time the earnings report for the October quarter comes out, but there is no certainty on that. Thus, NVIDIA currently looks riskier than AMD.