The Ratings Game: Nvidia’s stock suffers record plunge after analysts say it’s time to sell
Shares of Nvidia Corp. plunged on heavy volume on Thursday, after two Wall Street analysts swung to rare bearish ratings on the graphics chip maker, citing concerns over valuation and a tempered outlook for gaming.
Analyst Romit Shah at Instinet downgraded Nvidia to reduce from buy. Shah also slashed his stock price target to $ 90, which is 10% below current levels, after raising it to $ 100 from $ 80 just two weeks ago.
BMO Capital analyst Ambrish Srivastava dropped his rating to underperform, after being at market perform for at least the last 2 1/2 years. He cut his stock price target to $ 85, or 15% below current levels, after raising it to $ 100 from $ 75 less than three weeks ago.
Nvidia’s stock NVDA, +0.97% tumbled $ 10.27, or 9.3%, to suffer the biggest price decline since it went public in January 1999. The one-day percentage selloff was the stock’s biggest since it dropped 9.5% on Aug. 4, 2011. Volume spiked to 39.5 million shares, which was about 2 1/2-times the full-day average.
The stock has still more than tripled over the past 12 months, as investors rewarded the company for shifting its focus toward technologies used in artificial intelligence and autonomous cars. That compares with a 61% surge in the PHLX Semiconductor Index SOX, -0.04% and the S&P 500 index’s SPX, +0.15% 23% rally over the same time.
Only 5% of the companies covered by Instinet analysts were rated reduce through Wednesday, while 3.7% of U.S. companies covered by BMO were rated underperform. With Thursday’s downgrades, 15% of the 34 analysts surveyed by FactSet have the equivalent of a sell rating on Nvidia.
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Instinet’s Shah expressed concern that investors may soon become reluctant to pay such a relatively high premium for Nvidia’s stock, given how fickle they have been in the past. Nvidia’s price-to-earning ratio was 39.1, according to FactSet, above the P/E ratio for rival Intel Corp. INTC, +0.97% of 17.1 and for the S&P 500 average of 21.7.
“In addition to a significant premium to [comparisons], investors should recognize that the market’s enthusiasm for Nvidia’s emerging businesses is historically short-lived,” Shah wrote in a note to clients. “We believe consensus is underappreciating a slowdown in gaming and the potential impact to the multiple.”
He recommended investors use the money raised from selling Nvidia shares to buy Intel stock.
BMO’s Srivastava said he believes the stock is “overvalued at current levels,” given concerns that frenzy over fundamentals has started to cool and the potential for competitive pressures to emerge.
“We believe the perfect storm in fundamentals that drove the rarely seen magnitude of earnings upside is ebbing,” Srivastava wrote in a research note. “The competitive environment is going to look different as we go through the year, in both the gaming and data center business.”
He said current valuations aren’t yet pricing in any change in the competitive environment.
For chart watchers, Nvidia’s stock closed below its 50-day moving average for the first time since Feb. 17, 2016. That snapped a 256-session streak of closes above what many technicians view as a short-term trend tracker, the longest such stretch since in the stock’s history.