Citron Says NVIDIA Corporation (NVDA) Stock Belongs At $90, Does It Really?

Is NVIDIA Corporation (NASDAQ:NVDA) stock worth just $90 a share? Or are the fears overdone?

Shares of NVIDIA Corporation (NASDAQ:NVDA) tumbled nearly 7% yesterday, after a bearish call by famed short seller Citron Research, which said that “NVDA Belongs At $90“. Citron, headed by Andrew Left, has built a reputation for “unleashing eye-catching claims against companies that send their shares tanking”, as Antoine Gara of Forbes puts it. Citron’s claims have in the past unleashed the markets’ wrath on stocks like Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Facebook Inc (NASDAQ:FB), among others, and the impact on Nvidia seems to have been no different.

Citron’s claims aren’t without backing, although, as in most cases, some may agree, while others may not. The firm listed 6 reasons why Nvidia looks set for relatively tougher times ahead. Interestingly though, the report by Citron pegs the value of NVDA stock at $90 a share, implying a ~17% downside, even after yesterday’s sharp fall. Is NVDA stock due for further correction?

Is NVDA Stock Headed To $90?

Nvidia’s Growth, Market Share And Grip On Data Center And AI

To back its thesis, Citron has listed down six main reasons. Let’s look at each of them. The first concern is around Nvidia’s growth, which Citron believes has come largely on the back of market share gains, at the expense of Advanced Micro Devices, Inc. (NASDAQ:AMD), in the gaming space as opposed to a new addressable market. Given AMD’s recent progress, and the fact that it’s latest line up of Vega GPUs are expected to outshine Nvidia’s GPUs, the concern is probably valid in part. More so because Nvidia still generates about 62% of its revenue from its stronghold in the gaming space. (Also See: The Next Billion Dollar Opportunity For Nvidia).

Advanced Micro Devices, Inc. (NASDAQ:AMD) is also making progress in other segments, such as data centers and deep learning (1), which were almost completely dominated by Nvidia (between the two companies) until now. So, it’s probably fair to assume that Nvidia will find it tough to gain significantly higher GPU market share by eating into AMD’s piece of the pie. However, in most cases like data centers, AI, VR and self driving cars, the market itself is growing at a healthy clip, and Nvidia has thus far led the race by a huge margin. So, even if that equation changes, with Advanced Micro Devices, Inc. (NASDAQ:AMD) gaining a foothold in these sectors, the sheer growth in market itself is likely to drive Nvidia’s growth, even if by a lesser degree. In essence, what Citron has pointed out is indeed a threat, but it’s unlikely to choke Nvidia’s growth. What we’ve discussed here also covers Citron’s second concern around the growing competition in the data centers space.

AMD’s Threat To Nvidia’s Licensing Deal With Intel

Moving on to points numbered 3 and 4 in Citron’s list, these points raise concerns around Intel’s access to Nvidia’s IP via a licensing deal, and the potential loss of revenue from this stream when the deal ends in March 2017. As we discussed in a detailed post on this topic recently, the deal with Nvidia cost Intel Corporation (NASDAQ:INTC) $1.5 billion, spread over close to 6 years. And it does seem very likely that Intel will turn to AMD (2) once the deal expires in March 2017.

Viewed in the backdrop of Nvidia’s fast growing revenue base of over $6 billion in the last 4 quarters, that might not seem like much. Given the high margin nature of licensing revenue streams though, it might basically take that Dollar amount straight out of the bottom line, which is what Citron fears as well. If you base your estimate on Nvidia’s LTM EBITDA (Last Twelve Months Earnings Before Interest Taxes Depreciation and Amortization) of about $1.4 billion, the impact could be as high as 17%. Do note, this calculation doesn’t factor in the expected growth in EBITDA in the coming years. So, the impact is likely to reduce with each passing year. However, as is evident, the likely impact isn’t negligible by any means. (Also See: Will NVIDIA Corporation (NVDA) Stock Continue To Surge Higher In 2017?).