2023-05-30 09:00:46 ET
Summary
- Nvidia Corporation's growth momentum may be about to falter.
- Its high-end GPUs have been driving revenue and EPS beats, but the adoption of Nvidia's new mainstream GPUs is not happening yet.
- Nvidia Corporation stock seems poised for a major correction.
Nvidia Corporation ( NVDA ) has blown past all expectations of late. The chipmaker beat the Street’s estimates, including those by yours truly, by a huge margin, and its management issued a rather bullish outlook for the quarter ahead. This triggered a buying frenzy amongst investors that has driven NVDA shares to all-time highs.
But while euphoric celebrations have their place, there are a few red flags with regards to Nvidia’s growth story that nobody seems to be taking into account. In this article, I’ll discuss some of these concerning items and attempt to explain why it’s prudent to sell shares in Nvidia at current levels. Let’s take a closer look to gain a better understanding of it all.
Sign 1: Poor Sell-Throughs
For the uninitiated, Nvidia has been gradually releasing its RTX 40-series GPUs over recent months. Its high-end RTX 4090 and RTX 4080 GPUs were released in last October and November, respectively. These have been bestselling GPUs at many e-commerce portals and undeniably deliver an impressive performance uplift over the last generation.
However, when it comes to the mainstream budget segment, the chipmaker has only been struggling. First it had to officially un-launch one of its mid-range GPUs because the mainstream gaming market felt it was priced exorbitantly and responded poorly to it. Then it released RTX 4070Ti and RTX 4070 GPUs in January and April of this year, respectively, but the latter’s sell-throughs were reportedly so poor that its production had to be halted this month.
The situation is so bad that Nvidia is now said to be working on a higher-spec’d version of the RTX 4070 GPUs (with 16GB RAM) to gain traction in the mainstream segment. One might ask – how can the situation be bad, if Nvidia blew past the Street’s revenue and EPS estimates? We’ll get to it in a while, but for now, let’s note that its RTX 4060/Ti GPUs that were released earlier this month are also being shunned by the mainstream gaming market, despite already being discounted at some retailers.
Here’s a review from a technology website Techspot that will put things in perspective:
…we don't need to conduct an exhaustive test on the RTX 4060 Ti 8GB to inform you that it represents shockingly poor value and is a deeply disappointing release from Nvidia… we strongly advise against purchasing, at least not for $400 – perhaps $300, but certainly not $400.
Other technology websites are echoing similar opinions (like here and here ) about these newly released RTX 4060/Ti GPUs.
So, my initial hypothesis is that Nvidia outperformed the Street’s estimates on the back of its higher-end RTX 4080 and 4090 GPUs while its mainstream GPUs have failed to sell in volumes. These high-end SKUs deliver a significant performance uplift over the last generation and carry much higher Average Selling Prices (or ASPs) to impact Nvidia’s overall financials even on limited volumes. But that’s just my initial hypothesis – rather than arriving at any conclusion on the back of speculative reports, let’s look at some data points that validate the hypothesis.
Sign 2: Channel Sales Slowdown
This is where it starts to get interesting.
See, Nvidia is not a vertically integrated chipmaker and it has a number of partners that fabricate its chips - like Taiwan Semiconductor Manufacturing Company Limited ( TSM ), Samsung Electronics Co., Ltd. ( SSNLF ) and GLOBALFOUNDRIES Inc. ( GFS ) - and assemble them in the form of usage products, and then distribute them globally through their global sales networks (like Gigabyte, MSI, ASUS). Many of its Taiwanese partners actually report monthly sales figure, which we can track to assess the state of the computing and peripherals industry. For the month of April, the sales data of these Taiwanese companies was fully released last week.
Note in the table above how many of these channel partners reported rampant sales declines during April. It’s an indication that channel sell-throughs are dropping and that it has become difficult for these partners to maintain their prior levels of sales, let alone grow on a year over year basis.
These widespread sales declines are a clear indication that the computing and peripherals industry isn’t as healthy as many believe it to be. The sales slump is intensifying which will inevitably impact Nvidia and its peers, like Advanced Micro Devices, Inc. (AMD) and Intel Corporation (INTC). This lends some credence to the reports linked above – that Nvidia is struggling with mainstream GPU sales, it has had to halt production and that the majority of its revenue growth was driven by low-volume and high-ASP shipments of RTX 4080/4090 GPUs.
Sign 3: Low Inventory Turnover
Still not convinced? Let’s look at Nvidia’s own inventory turnover ratio. It indicates how many times a company was able to turn its inventory, and convert it into sales, in a said period of time. Ideally, investors would want that their company increases its inventory turnover ratio over time, as that enables revenue growth without a proportional increase in financing or working capital requirements.
Now, let’s look at the chart below – note how Nvidia’s inventory turnover ratio is hovering close to its 20-year lows:
This only means that Nvidia is unable to convert its inventory into sales, as easily as it used to in the past. Bear in mind that Ycharts is already factoring in average inventory levels of the last 2 quarters in its calculation, to eliminate the element of cyclicality and one-time aberrations.
This, again, ties up with the hypothesis that Nvidia’s sell-throughs are weak. This also lends credence to reports about the chipmaker having to halt production due to weak sales and excess inventory buildup.
Implications for Investors
The signs seem to be clear – Nvidia’s growth momentum seems to be on the verge of a slowdown. Upcoming GPU launches by AMD will only intensify the competition and further weigh down on Nvidia’s sell-throughs, at least for the time being. I contend that Nvidia’s revenue and EPS beats were driven by pent up demand for its high-performance RTX 4080 and 4090 GPUs but the mainstream adoption is just not happening. Retailers across the globe are struggling with an inventory glut due to challenging macroeconomic conditions and restrained consumer spending, and Nvidia is bound to take a hit as well.
If Nvidia Corporation stock were trading at modest levels, we could have overlooked some of the risk factors and given it a “Buy” or a “Hold” rating. But NVDA stock is trading at over 37-times its trailing twelve-month sales -- the highest level it has been in 10 years and well above its closest peers. It seems the Street is pricing Nvidia for perfection, and ignoring the growth slowdown that’s right around the corner.
Therefore, I believe Nvidia Corporation shares are overvalued at current levels and that they're due for a major correction. So, I have a "Sell" rating for Nvidia Corporation stock. This, however, should not be construed as a call to short the stock. Good Luck!
For further details see:
Nvidia: Sales Slump Is Around The Corner