Shares of semiconductor manufacturer Nvidia Corp. (NVDA) have taken a beating in the recent period, down nearly 30% over three months amid a broader sell-off in the once red-hot chip industry. Now, one team of bears on the Street warns that more bad news waits ahead for the Santa Clara, Calif.-based tech company, which is gearing up to post its most recent quarterly report on Nov. 15.
Chip Makers Struggle on Graphics Business Weakness
In a note to clients on Thursday, Bank of America Merrill Lynch lowered its 12-month price target on Nvidia stock from $360 to $300, attributing the more limited upside to disappointing quarterly results from rival Advanced Micro Devices Inc. (AMD), as outlined by Barron's. Chip maker AMD has seen its shares lose nearly 40% of their value this week following earnings results in which top line numbers and weaker than expected guidance fell far from the Street's forecasts.
BofA highlights weakness in AMD's graphics chip business for PC gaming and other data-center applications, in which Nvidia is its biggest rival, as a red flag for the sector at large.
"AMD attributed weaker results to softer graphics card (GPU) channel sell-through…which will take a few quarters to work through,” wrote BofA analyst Vivek Arya. “Importantly we view this as a negative read-across for NVDA’s 2H18 PC gaming business.”
In the third quarter, AMD posted Computing Graphics segment sales that were more than $100 million short of expectations. The company said the miss was "entirely" the result of an unexpected slowdown in its graphics business, and that inventory levels for its graphics products remain above average in the retail channel.
Nvidia Still a Buy on Long-Term Prospects in Emerging Markets
Despite short-term downside for Nvidia, Arya remains bullish overall given longer-term prospects for the company in emerging technology markets.
BofA views "current risk-reward profile as especially attractive. NVDA remains the most unique investment in semis and technology given its exposure to multiple 10x secular growth markets in artificial intelligence (AI), gaming, and autonomous cars."
AMD's wreck and the more cautious note on Nvidia come as handfuls of analysts on the Street warn on a downcycle set to drag chip stocks deeper into a correction. Bears at firms such as Goldman Sachs and Morgan Stanley have reiterated their outlooks for greater losses as investors sell on deteriorating market fundamentals.