Why Goldman Is Downgrading Nvidia (And The Stock Is Down 2%)

Goldman Sachs downgraded NVIDIA Corporation NVDA Sunday from Neutral to Sell and raised its price target from $18 to $20.

Analysts led by James Covello believed that Nvidia's technology and execution were outstanding, however, if licensing with 

"We see a very low probability of Intel and Nvidia renewing the licensing agreement," Covello cautioned and noted that "based on the current agreement, Intel has access to the agreed-upon patents in perpetuity, implying that Intel would need to renew the licensing agreement if it wanted access to patents that Nvidia filed after March 31, 2017."

Covello added that Nvidia files between 500 to 1,000 patents annually and that "it is unlikely that Intel will renew the agreement, as Intel has been working for several years on work-arounds that do not infringe upon Nvidia's technology."

The analysts felt the market had become complacent over the renewal of the Intel licensing agreement. The firm's SanDisk Corporation SNDK, QUALCOMM, Inc. QCOM and pharma case studies suggested that "stocks see 15 percent [to] 60 percent multiple compression going into binary events where licensing/patents are in jeopardy."

GPU growth was also seen as likely to decelerate in 2015 due to slowing PC growth while the market had given "Nvidia significant credit for diversification into auto," according to the analysts, however, auto was only 4 percent of sales and likely to be limited by competition, such as Mobileye NV MBLY.

Covello commented that the firm "could become more positive if Nvidia were to drive enough scale in new segments to offset the $264 million in annual licensing profit," however, auto and datacenter segments were becoming more competitive and currently drove less than 10 percent of EBIT.

NVIDIA Corporation recently traded at $22.86, down 2.60 percent.