NVDA: Still Expensive for the Risk

Nvidia (NVDA) recently lost its major catalyst (the pandemic driving up retail sales), and is about to lose another: the mining of Ethereum (ETH). Additionally, the heightened geopolitical tension increases risk to NVDA’s supply chain.

Unfortunately, the broad market downturn has hit tech growth stocks the hardest. After a 45% drop in price, has NVDA shifted away from being overvalued to undervalued? Not quite yet; I am neutral on NVDA.

End of GPU Cryptocurrency Mining

Ethereum mining has been a major catalyst for GPU demand. However, Ethereum mining is nearing its end. No definitive date is set for Ethereum’s switch to proof-of-stake, however many expect it to occur by the end of June 2022. 

GPU prices were continuously heightened well above MSRP since the last major release of NVDA’s 3000 series release in September 2020. However, over the last couple months GPU prices have dropped to MSRP and availability has returned to pre-pandemic normality.

NVDA would have not significantly benefited directly from the above MSRP prices, but from quantity demand. The massive quantity demand has however allowed for the MSRP to remain high throughout the 3000 series.

Ultimately, don’t expect the same pricing power to last as long for the 4000 series. The 4000 series does not have a set release date, but if history of previous launches is any indicator, September is a reasonable bet. 

You may ask why don’t miners just switch to a different crypto? Well, there are no suitable options for large scale mining. The largest cryptocurrency Bitcoin (BTC) uses specialized ASICs, not GPUS. Any GPU mineable crypto has too small of a market cap for large scale mining operations to co-exist. 

Simply, GPUs are unlikely to have a major place in cryptocurrency in the near future.

Additionally, the end of GPU mining will likely flood the second-hand GPU market. In 2018, we saw a significant decline in used market prices, lowering the pricing power of new GPUs. 

Geopolitical Impact

The Russian invasion of Ukraine is not directly important to NVDA as both regions are minor in sales, but the invasion has changed geopolitical risk analysis.

In light of the invasion, many investors are reconsidering the risk of a Chinese invasion of Taiwan. 

NVDA is dependent on Taiwan Semiconductor Manufacturing Company (TSM), as it is the leader in semiconductor nodes. NVDA’s main competitor, Advanced Micro Devices (AMD), is as well. 

An invasion of Taiwan would be significantly more impactfactful than the Ukraine conflict, and would have broad reaching market impacts well beyond the semiconductor industry.

So, if you are avoiding any of the semiconductors who use TSM because of this risk, you may as well not invest in any equity as the market implications would be that drastic.  

Additionally, both the U.S. and E.U. have started funding towards domestic fabs and switching to a supply chain of like-minded countries. This will lower the direct risk of the potential loss of Taiwan fabs to the semiconductor business.

Intel’s (INTC) Ohio fabs, which will now cater to third-parties, are expected to come online by 2025, and are likely to rival TSM. 

Is the Price Reasonable?

During the pandemic bull run, NVDA propelled to an all time high of  $346.47, and has since fallen to $185. 

NVDA is still valued higher than its peers on a P/E comparison. NVDA has a P/E of 48.2, AMD has a P/E of 33.2, and INTC has a P/E of 9. By these valuations, the market expects NVDA to grow faster than AMD and INTC. 

Although NVDA is still high in comparison to its peers, it has a similar P/E to its own pre-pandemic P/E. The absurd overvaluation period seems to be over, but that does not mean NVDA has found its bottom yet. 

Many bulls will state the high valuation is due to superior technology, which may not be true in the future. The higher the P/E (or any valuation ratio) the more weight is put on future growth, so if growth declines faster than expected, the share price can plummet. 

AMD is catching up to NVDA in GPU performance. The Radeon 6000 series was the most competitive top-end release AMD has had in years. If AMD continues the performance jumps, NVDA’s growth could be at risk.

Just look at how quickly AMD disrupted INTC’s CPU dominance with Ryzen. 

Wall Street’s Take

Turning to Wall Street, NVDA earns a Strong Buy rating, with 21 Buy and five Hold ratings assigned over the past three months.

The average NVDA stock price forecast of $336.57 implies 81.5% upside potential.

Concluding Thoughts

NVDA has fallen significantly, but it is not exactly trading at a discount, it is only in line with its pre-pandemic self. Extreme demand from the crypto market is gone, and the risk of competition is rising.

Although the current price is not the worst entry for long-term buyers, short term market volatility may provide a better entry point.

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