The optimism around NVIDIA Corporation (NASDAQ:NVDA) may be overdone right now. Tread cautiously with Nvidia stock in 2017 at prices above $100.
NVIDIA Corporation (NASDAQ:NVDA) had an excellent 2016 surpassing $117 a share on the 27th of December. However, due to the end of year profit-taking or worrying trends that look to be on the cards in 2017, investors aggressively took profits at the back end of last year.
At CES 2017, CEO Jen-Hsun Huang went through the company’s achievements to date but also outlined where the company sees robust growth over the next few years. Autonomous cars, the video game market, and artificial intelligence are the prime areas that will drive this company forward.
In fact, the self-driving cars market looks particularly appealing to Nvidia investors, especially when you take note of the partnerships the company has already entered into. Nvidia finishes its fiscal year at the end of January, and earnings of $2.45 a share are expected on revenues of $6.84 billion.
Margins (both operating & gross) continue to gain traction but the company’s expected 2018 & 2019 average earnings growth is about 17%, which is much lower than this present fiscal year. Therefore, since growth stocks are usually priced to perfection, Nvidia will need to at least nail projections for its share price to keep climbing. I would be cautious getting long here since a lot of growth being priced into the stock already. Here are 3 worrying trends to back up my thesis.
Also Read: This Could Hurt Nvidia And AMD In 2017.
Nvidia Is Not Diversified Enough To Become A True Growth Stock
This year the company is going to more than double its earnings, which is a feat Nvidia hasn’t achieved for over a decade. Nvidia clearly wants to double down on its gaming business in order to increase market share. This is where bearish analysts have a problem with the company’s earnings trajectory. For Nvidia to be a real proper growth stock, it just isn’t diversified enough across multiple markets. The company used CES 2017 to announce the PC version of GE Force NOW which is a streaming service (1) for dedicated video gamers. This endeavor is fraught with risk in my opinion for a number of reasons.
Steaming Gaming At Scale Will Be Hard To Pull Off
Firstly, the price seems very steep at $25 for 20 hours of play. This price point could, in fact, shrink the market which is not what Nvidia wants over time. Secondly, a sizeable chunk of company sales connected with the PC industry has to be a worry considering the lower trends of PC shipments we have been seeing over the past few years. Furthermore, streaming video games have to be so precise that a microsecond glitch could effect the user’s game play. Moreover, the data centers on Nvidia’s side along with the internet connection on the gamers side would have to be operating perfectly for GE Force NOW to work at top capacity. Not an easy feat in my opinion, which would make it a revenue source that would be difficult to scale. (Also See: Don’t Buy NVIDIA Corporation (NVDA) Stock Just Yet).