Bank of America analyst Vivek Arya has reiterated a Buy rating on Nvidia (NASDAQ:NVDA) stock and a Top Pick designation after shares extended losses yesterday.
Nvidia stock price closed 5.2% lower yesterday, fueled by a Baird downgrade call. This way, Nvidia shares are down roughly 25% in the last 2 weeks.
However, Arya believes that selling is likely done. He also addressed investor key concerns that facilitated a sharp drop in Nvidia stock recently.
“The key concern relates to NVDA’s gaming business (44% of sales) that could face weaker demand from customers in Europe (Russia turmoil), China (lockdowns) and crypto mining (Ethereum price declines, change to proof-of-stake which does not require graphics cards). We flag these headwinds, but argue investors could be underappreciating other supportive trends including: (1) strength in data center, pro-viz and 2H autos ramp; (2) upcoming new Hopper-based gaming product cycle in 2H; (3) low gaming channel inventory so any end- user slowdown could be used by channel to restock inventory,” Arya said in a client note.
When it comes to a slowing demand in the PC gaming market, the analyst acknowledged headwinds related to Europe, China, and Ethereum. However, these headwinds imply “only a 7-9% EPS impact to FY23/FY24E (roughly CY22/23E) pf-EPS.”
On the other hand, the analyst sees a greater upside potential as “incremental capacity can be directed to the more profitable (data center, pro-viz) parts of NVDA’s business.”
With these headwinds mostly priced in NVDA stock, Arya continues to advocate for a recovery in shares.
“We continue to see NVDA as one of the most important growth companies in semis, perhaps in tech given its ability to grow sales in high entry-barrier computing markets at a 20-25% CAGR (3x semis industry growth), while maintaining industry leading 45%+ EBIT mgns. Balance sheet is solid, and the company is just starting to embark on large new metaverse, enterprise AI and software opptys. Rising interest rates bring the trading multiples under scrutiny, but we assume that volatility should be reflected in the market over the next few weeks, helping to drive a recovery in NVDA stock,” he concluded.
Nvidia stock price is up nearly 1% in pre-open Tuesday.
By Senad Karaahmetovic