NVIDIA Corporation (NVDA) designs and manufactures specialized graphic chips that are used in a wide variety of electronics including computers, tablets, mobile devices and other electronics. Since it focuses on some niche parts of the PC industry like gaming computers, it has enjoyed higher profit margins when compared to other more "generic" chipmakers. However, that might not be enough to keep the stock elevated in a declining macro environment for the PC industry and the global economy in general. Multiple signs are adding up fast and pointing to a worse than expected slowdown in PC sales. Furthermore, the industry might not get relief from the highly anticipated launch of Microsoft's Windows 8 operating system, since some recent reports say it has glitches. While NVIDIA shares have been faring better than some chipmakers in recent days, it seems like that the stock could be poised to breakdown and hit new 52-week lows in the coming days and weeks. Here are 4 reasons why NVIDIA shares could be heading lower soon:
1. NVIDIA already saw a slowdown in earnings last quarter as it reported earnings of $119 million, or 19 cents a share, which was down from earnings of $151.6 million, or 25 cents a share, in the same quarter last year. Based on recent revenue and profit warnings from some top chip makers, it appears that revenues could be poised to head even lower.
2. Intel (INTC) recently warned that Q3 revenues and earnings would come in significantly lower than what had been expected. The weakness was significant and revenue estimates are now expected to be around $13.8 billion versus prior estimates that were as high as about $14.8 billion. A recent Reuters article sums up the troublesome warning from Intel, and it states:
"A revision of Intel targets had been expected by some analysts after PC makers Hewlett Packard Co (HPQ) and Dell Inc (DELL) warned of slow demand last month, a development that has been compounded by a shaky global economy and consumers shifting toward tablets and smartphones. But the 8 percent reduction in the top chipmaker's revenue outlook was much more severe than expected. Intel also withdrew its full-year forecast."
3. More recently, on October 11th, Advanced Micro Devices (AMD) announced that third quarter revenues might be down about 10% from the prior quarter. This leading chipmaker also said margins would take a major hit in the quarter that just ended on September 30, from expectations of about 44% to just 31%. AMD shares were already trading near 52-week lows, but this news took the stock down even further in after hours trading to new lows. This warning is yet another and very fresh sign that seems to indicate estimates for many companies in the chip and PC sector are too high and therefore prone to disappointment.
4. When compared to other chip stocks, NVIDIA shares still look expensive and that could mean the stock has additional downside potential. Intel trades for about 10 times earnings and it pays a dividend yield of about 4%. AMD shares are also trading for about 10 times earnings estimates for 2013, although it does not offer a dividend. However, NVIDIA shares trade at about 14 times earnings which is a significant premium, and one that might not be sustainable.
With industry leaders like Intel and AMD seeing a recent and significant reduction in chip demand, and with both of those stocks hitting fresh 52-week lows in the past day, it seems increasingly likely that NVIDIA might be the next chip stock to make the 52-week low list.
Key Data Points For NVIDIA From Yahoo Finance:
Current Share Price: $12.74
52-Week Range: $11.63 to $16.90
2012 Earnings Estimate: 89 cents per share
2013 Earnings Estimate: $1.07 per share
Key Data Points For Intel From Yahoo Finance:
Current Share Price: $21.68
52-Week Range: $21.52 to $29.27
Dividend: 90 cents per share which yields 4.1%
2012 Earnings Estimate: $2.12 per share
2013 Earnings Estimate: $2.16 per share
Key Data Points For Advanced Micro Devices From Yahoo Finance:
Current Share Price: $3.20
52-Week Range: $3.09 to $8.35
2012 Earnings Estimate: 25 cents per share
2013 Earnings Estimate: 33 cents per share
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.