Stock of the week - Nvidia (26.05.2022)

Nvidia is one of the world's largest chip and graphics card manufacturers. The company presented quite a solid quarterly report, but the forecasts for Q2 2022 don't look very optimistic:

Revenues: $8.29 billion. Expectations: $8.10 billion

Adjusted earnings per share: $1.36. Expectations: $1.29 

Gaming revenue: $3.62 billion. Expectations: $3.53 billion

Data industry revenue: $3.75 billion. Expectations: $3.63 billion

Forecast for the coming quarter: $8.1 billion. Expectations: $8.44 billion.

• The company estimates that supply chain losses in China and the war in Ukraine cost it $500 million impacting earnings and estimates;

• Companies like AMD and Nvidia are losing further amid declines and an outflow of interest in the cryptocurrency market. By falling demand for the graphics cards used by 'miners' to validate transactions on the blockchain network thanks to computing power, their prices are also falling, affecting results;

• Modest forecasts for the coming part of the year worry investors in the technology sector, which has already experienced a massive sell-off since the beginning of the year. The technology NASDAQ is the worst performing of all U.S. indices and has already lost nearly 30% from its highs;

• Nvidia is one of the so-called growth companies whose high valuations have so far justified surging revenues. With enthusiastic growth forecasts declining and growth companies struggling to generate incremental profits, valuations are losing ground. Nvidia's price-to-book ratio is still very high at nearly 15.4, compared to Intel's P/BV of 1.73. The price-to-earnings ratio is also high at nearly 42.26. All of this may suggest that Nvidia's stock was extremely 'pumped up' by shareholder optimism;

• Intel CEO Pat Gelsinger recently commented that semiconductor availability issues could last as long as 2024;

• Meanwhile, Nvidia will soon unveil its new RTX 4000 graphics chips, which according to the manufacturer's specifications will give a significant performance boost and potentially positively impact the company's results. The long-term potential for the gaming and cloud computing data service industries, which are one of Nvidia's primary sources of revenue, remains upward;

• The $500 million forecast cut, while a concern, is unlikely to herald a collapse in the company's business model. Nvidia's capitalization is close to $425 billion. The problem for the stock is 'overvaluation' driven by investors' belief in great performance in each quarter of the company's operations, bulls may be forced to find the right valuation for tech companies again; 

• Nvidia's stock decline before the open also spills over to other companies in the sector including Snowflake (SNOW.US) and Advanced Micro Devices (AMD.US). Right now, Nvidia shares are off nearly 6% in pre-market trading.

Nvidia (NVDA.US) shares, D1 interval. The company's stock gained mightily during the pandemic when sentiment around technology stocks remained high. Currently, we see a significant deterioration in sentiment. The potential opening near  $160 will coincide with 61.8 Fibonacci retracement and may encourage bulls to counterattack. On the other hand, in the case of deepening declines, an important zone will be the range between $125 and $160, where the price may move in a sideways trend. The limits of the potential consolidation are almost determined by 61.8 and 71.6 Fibonacci retracements. In view of the weakness of the NASDAQ index, this scenario seems more possible now. Source: xStation5