What One Analyst Thinks Will Get Nvidia's Stock Going Again

NVIDIA Corporation NVDA shares, which have had a scintillating run in 2016 gaining 229.7 percent over the year, are showing signs of slowing down.

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Despite the broader markets trading close to all-time highs, Nvidia has been on a consolidation mode for much of this year. The stock is down 6.08 percent for the year-to-date period compared to the 5.29 percent gain for the S&P 500 and the 9.17 percent gain for the NASDAQ Composite.

Technically, the stock is in the oversold zone (as indicated by the 14-day relative strength index, which is currently at 40.39). It is now trading below its 50-day simple moving average, which offered support to the index through the rally of 2016. The 50-day moving average, currently at $106.76 could serve as a resistance level for the stock.

Fundamentally, what has changed since 2016 and what can get the stock going. UBS analyst Stephen Chin analyzed in a note released on Friday following his meeting with the management.

One Of The Best Growth Stories In Semis

UBS still thinks Nvidia's sales are not slowing and that it remains one of the best growth stories in all of semis, given its early momentum in chip sales into machine learning, autonomous driving and virtual reality.

Expectations Concerning Different Segments

• Data center sales to continue its strong year-over-year growth, with the current penetration rate estimated at 1.5 percent; data center chip sales to grow 31 percent in 2018 and 33 percent in 2019.
• Pascal chip penetration in the gaming segment estimated at 19 percent; gaming chip revenues estimated to grow 19 percent in 2018 and 13 percent in 2019.

Summing up its expectations, UBS said, "We believe business trends are tracking in line with prior Apr-17 quarter guidance, and note that C2H is seasonally stronger for gaming GPU demand compared to C1H."

Bull And Bear Arguments

UBS presented one of the bull and hear arguments on the stock, which is the likelihood of Nvidia introducing its new 12nm Volta chip this year around the GTC event in early May 2017. The firm noted that the 16nm Pascal chips currently being used were launched in June 2016, with sales ramping in October 2017.

"Our own checks suggest that all the major hyperscale data center operators are offering GPU chips in public cloud infrastructure and are willing to pay for high-end Tesla Inc TSLA GPUs given an emphasis on fast AI training performance," the firm added.

Maintaining Estimates

UBS said it maintains its 2018 earnings per share estimate at $3.25 and 2019 estimate at $4, as it expects Nvidia to take more dollar share of the data center computer market.

Concluding, the firm said it came away confident from the meeting that Nvidia had more levers to pull such as benefits from SoC chip sales into the Nintendo Co., Ltd (ADR) NTDOY Switch. This, according to the firm, could partially offset some first-half gaming seasonality as it ramps to full production. The firm also noted that the chip has an operating margin profile of 20–30 percent, or in line with the corporate average.

UBS has a Buy rating and a $132 price target on the shares of Nvidia.

At the time of writing, shares of Nvidia were down 0.50 percent at $100.27.

Related Links:

NVIDIA Is Up 190% In 2016: Here's Why You Should 'Jump On Board' For 2017

The Hottest Stock Of 2016 No Longer A Buy For This Analyst ________ Image Credit: By Mahogny (Camera) [Public domain], via Wikimedia Commons