Optimism about Nvidia Improves but Risks Remain

Nvidia (NVDA) has led the recent rally in semiconductor stocks in the past month, but some analysts are concerned the rally may not have much farther to run.  Nvidia will report its Q3 results Wednesday, and analysts are predicting an -18% drop in sales.  However, Nvidia currently trading at a high 39 times estimated earnings, which means the stock may be priced for a much better environment than at present when the global economy might be heading for a recession.

Nvidia has rallied +45% from its mid-October low, but it is still down -45% for the year.  Centre Asset Management is concerned that Nvidia’s earnings could deteriorate if the economy goes into recession, saying, “it’s the worst of all worlds because the rate of revenue growth is declining, macro fundamentals are deteriorating, and the valuation is still exceptionally high.” 

Optimism in the outlook for technology stocks has recently improved.  Regulatory filings this week showed that Warren Buffett’s Berkshire Hathaway took a $5 billion stake in Taiwan Semiconductor Manufacturing, which makes chips for Nvidia.  Also, the softer-than-expected U.S. October CPI and PPI reports have bolstered expectations for the Fed to slow the pace of interest rate increases as inflation cools, which might allow the economy to avoid a recession.

Nvidia is a bellwether for semiconductor stocks and is the biggest component of the Philadelphia Stock Exchange Semiconductor Index ($SOX).  Institutional investors have long favored Nvidia because of its favorable track record. In the ten years up to Nvidia’s record high in November of 2021, its shares have returned +58% annually, far outpacing Apple (AAPL), Amazon.com (AMZN), or Microsoft (MSFT).

However, concerns remain about earnings for semiconductor companies.  Nvidia last quarter issued a cautious forecast for its earnings, as did Texas Instruments, Intel, and Qualcomm this quarter.  Analysts have cut Nvidia’s 2023 earnings estimates by -16% over the past three months, and the consensus for revenue is for a decline of -11%.  However, at 39 times earnings, Nvidia is 33% more expensive than its average for the past ten years and sells for more than double the multiple of the semiconductor index. Nevertheless, Citigroup and Morgan Stanley remain positive on Nvidia’s long-term prospects and forecast Nvidia will return to double-digit growth in 2024.

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