Could Nvidia Stock Drop To $200?

by Trefis Team
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Nvidia’s stock (NASDAQ: NVDA) has risen more than 2x this year and currently trades at 63x projected 2021 earnings (Nvidia’s fiscal year ends in January), with 2021 earnings-per-share (EPS) expected to come in at around $8.00 (vs. $4.59 in 2020). But will the stock continue its strong rally over the coming years? Or is a sharp reversal in the cards?

The Trefis interactive dashboard What Factors Drove 164% Change In NVIDIA Stock Between 2017 And Now? details Nvidia’s performance over recent years. Going by the company’s historical performance, a strong rally in the company’s stock is definitely a possibility – something we detailed in our analysis on Nvidia’s upside: Nvidia Stock Headed Toward $700? But a prudent investor would not rule out an alternate scenario where revenues drop around 30% by 2024 (from the $14.65 billion projected for FY 2021). This could result in EPS shrinking around 40% (to $4.80 from the $8.00 now projected in 2024), taking the stock to as low as $200. Here’s how this could play out:

Nvidia’s Revenues could drop to 0.68x of 2021 projected levels of $14.65 billion by 2024, representing a drop of roughly 12% per year (for context, annual growth was about 30% between 2016 and 2020). There are multiple threats to Nvidia’s growth that could result in this trend shift:

  • Firstly, more players are looking to enter the data center GPU market, giving Nvidia a run for its money.
    • For context, the share of data center revenue in Nvidia’s total revenue has jumped as of Q1 2021 (37% of total revenue vs. 28% in Q1 2020).
    • As the data center business is more profitable than the gaming GPU segment, gross margins came in at 65% in Q1 ’21 vs. 58% for the same period last year.
    • Increased competition in the data center market could lead to a drop in GPU selling prices, eating into Nvidia’s current revenue and margin growth.
  • Secondly, Sony and Microsoft will see their new consoles (powered by AMD chips) roll out by the end of 2020.
    • Of late, in the gaming segment, Nvidia’s GeForce RTX graphics processor has been gaining traction, and the company claims it could give Sony and Microsoft a run for their money by making RTX-powered notebooks the most powerful gaming consoles in the world.
    • However, we believe demand for gaming laptops could take a hit, as people lean toward dedicated consoles over Nvidia-powered laptops.
    • Look at it this way; if you want to buy a device to read books, you’re more likely to buy the Kindle rather than a tablet computer.
    • Further, if the new gaming consoles are more competitively priced, that would make them a more obvious purchase compared to powerful gaming laptops, which start at around $1,000.
  • Finally, after a failed attempt to enter the GPU market in the mid-2010s, Intel is taking another shot at manufacturing GPU chips to compete with AMD and Nvidia.
    • Earlier slated to launch by Q3 2020, these could get delayed till early-2021 due to the pandemic.
    • Nvidia’s GPU market share currently stands at around 70%, and the entry of a third player – especially a giant like Intel – will likely hurt Nvidia’s market share and lead to a drop in selling prices, further eating into Nvidia’s revenues and margins.

If these scenarios play out, we could see Nvidia’s total revenue dropping to around $10 billion by 2024. Net Margins will also take a hit, and the combined effect of this could see Nvidia’s EPS drop by around 40%, to $4.80 for that year. Projected margins for 2021 stand at around 33%, but could drop to 29% by 2024. We expect $10 billion in revenues combined with 29% net margins to translate into a net income of around $2.9 billion in 2024.

Now, if Nvidia’s EPS drops to $4.80, the forward P/E multiple will jump to 106x, assuming the stock price stays the same, correct? But that’s not really reasonable! If EPS falls 40% over the next few years, the forward P/E will also shrink, as investor expectations fall. We believe the P/E could shrink by around 30% in response – coming in at around 42x. For context, Nvidia’s closest competitor AMD currently trades at a 75x forward multiple, but Intel trades at a significantly lower 10x. So a P/E multiple of 42x is perfectly plausible if investor expectations drop. This would mean that Nvidia’s stock price could sink by around 60% to $200 by 2024.

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