The former high-flyer Nvidia was literally hit to the core by the crash in tech stocks. From a high of USD 346 in November 2021, it has fallen to USD 136 today. In other words, more than half a trillion in market capitalization was wiped out. And as if the general headwinds in the tech sector were not enough, additional pressure is now coming from the company's own government. A few days ago, for example, Washington restricted the export of two of Nvidia's best computer chips for artificial intelligence - H100 and A100 - to the Middle Kingdom.
This news alone cost Nvidia USD 40 billion in stock market value. At the current level, however, the question arises whether all the negative news has not gradually been sufficiently priced into the share price? To find an answer, we need to take a closer look at the operating business and an assessment of further growth prospects.
As far as the current development is concerned, Nvidia is clearly in reverse gear. In particular, the weakening market for computer games and also the crypto crash are causing lower demand for the high-end processors. Thus, the world's largest manufacturer of graphics and AI chips achieved a turnover of USD 6.7 billion in the three months from May to July. Although this still means a small plus of 3% compared to the previous year, this corresponds to a fat minus of 19% compared to the previous quarter. The company was also unable to convince on the profit side. Due to a billion-dollar write-down because of the slump in graphics card sales, Nvidia reported a profit of less than USD 1 billion for the first time since mid-2020. Earnings dived 72% year-over-year to USD 656 million. The outlook for the current third quarter of fiscal 2022/23 (Jan. 31) also disappointed. Nvidia expects sales of USD 5.9 billion, while analysts had just under USD 7 billion on the cards. By comparison, the group had generated USD 7.1 billion in the third quarter of the previous year.
So high inflation, which is putting the brakes on consumption, the consequences of the Ukraine war, and recurring corona lockdowns in key Chinese manufacturing centers are currently putting a damper on Nvidia's growth. However, there are also hopeful signs. Against the backdrop of a chip shortage, the European Union and the USA, among others, have announced major subsidy plans. At the end of July, the U.S. Congress passed a package worth billions of dollars to promote the domestic chip industry. In the short term, around USD 52 billion will be pumped into the sector, with a further USD 200 billion to flow into research over a period of ten years in order to ultimately be able to compete with China.
Furthermore, things are not going badly in every division at Nvidia at the moment. In the data center segment, the group is benefiting from the high level of investment by data center operators and cloud companies. Despite supply interruptions in the segment, sales increased by almost two thirds in the second quarter compared to the previous year. This means that this segment now accounts for slightly more than half of the group's revenues. Nvidia can also hope for good business here in the future. According to analysts at Technavio, the data center market will grow by an average of 22% annually between 2021 and 2026. North America will account for 35% of this growth.
Nvidia also continues to show itself to be strong in innovation. According to media reports, the next GPU generation "RTX 4000" alias "Ada Lovelace" could be presented this fall. Due to the expected 5 nm manufacturing process, the high-end GPUs should be able to achieve more than double the performance of the current Ampere graphics cards.
Conclusion: even if Nvidia's long-term growth phase is currently slowed down by many external factors, the technologically high-end company plays a crucial role in the trend towards digitalization, just like its competitors AMD and Intel. Without the powerful chips, the mega trends of the 21st century such as networking, artificial intelligence, autonomous driving or the metaverse would not be possible. The analysts also know this, and so the majority of the guild currently comes to a clear verdict after the sharp drop in the share price: "Buy". According to Bloomberg, 72% of 50 research reports result in a Buy rating and 26% in a Hold recommendation. The average price target is around USD 200.
So while the majority of analysts recommend buying the stock, prominent investors are already piling in. The ARK ETFs of the respected fund manager Cathie Woods, for example, have taken advantage of the sharp sell-off in the wake of the export ban to China to acquire shares worth USD 41.5 million. Investors don't have to go full risk right away, however: Leonteq now also offers conservative natures the opportunity to invest in the high-tech powerhouse. The new Softcallable Barrier Reverse Convertible allows for an above-average return even in a sideways movement. With a maximum term of 15 months - the first softcall observation day takes place after 6 months - the BRC in the CHF variant offers an attractive coupon of 13.00% p.a.. The USD-denominated counterpart even offers an interest rate of 16%. It is important that the barrier at 49% of the initial level is not touched, which in turn equates to a generous risk buffer of 51%. The barrier level is in a range which has not been reached since shortly after the Corona Crash at the end of March/beginning of April 2020.
Even a bit more yield is possible with a US chip basket. The new multi-BRC on Nvidia, AMD and Intel has a coupon of 18% p.a. with the same maturity. The barriers are also 51% away from the current price level of the trio.
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