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Here’s Why NVIDIA (NVDA) Stock Could be a ‘Sell’ in Today’s Market

Wedgewood Partners recently released its Q3 2020 Investor Letter, a copy of which you can download here. The Fund returned 10.77% for the third quarter of 2020. Meanwhile, the benchmark S&P 500 Index and the Russell 1000 Value Index gained 8.93% and 5.59%, respectively. You should check out Wedgewood Partners' top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Wedgewood Partners highlighted a few stocks and Nvidia Corp (NASDAQ:NVDA) is one of them. Nvidia Corp (NASDAQ:NVDA) is a technology company. Year-to-date, Nvidia Corp (NASDAQ:NVDA) stock gained 129.5% and on October 19th it had a closing price of $539.91. Here is what Wedgewood Partners said:

"We sold our position in NVIDIA Corp to fund the purchase of First Republic Bank during the quarter. NVIDIA has blown past previous peak valuation multiples as demand for its gaming and datacenter graphical processing units (GPU) have soared due to a new product cycle, as well as easy comparisons to slow 2019 sales. Earlier this year, the Company launched its new Ampere line of GPUs. Hypercloud customers such as Amazon AWS, Google Cloud, and Microsoft Azure have been quick to deploy the new “A100” chips as thousands of artificial intelligence/machine learning (AI/ML)-focused startups, enterprises, and research institutes demand more parallel processing power to run larger AI/ML models. Over the past decade, NVIDIA has developed a substantial library of software to help developers more easily utilize NVIDIA GPUs for industry-specific and domain-specific applications, ensuring limited competition from accelerated computing chip rivals. However, despite these notable achievements, NVIDIA’s datacenter end-market is quite concentrated around a handful of very large hypercloud customers that have quickly changed their buying patterns in the past – and no doubt will in the future. We estimate the market is assuming around a +25% compounded annual growth rate of NVIDIA’s revenue for the next five years, along with aggressive margin expansion. While that outcome is not impossible, we expect the path to that kind of growth will not be linear and that the market will rerate the stock lower, similar to previous cycles, if growth decelerates in its datacenter GPU franchise. NVIDIA has also enjoyed a significant boost in demand for gaming GPUs; because stay-at-home orders are conducive to increased gaming consumption. Coupled with a recent product launch, NVIDIA’s gaming unit should see robust demand for several more quarters. Unlike previous cycles, we think NVIDIA should have limited exposure to any kind of correction in bitcoin mining. NVIDIA continues to be an excellent business, with enviable market positioning and is benefitting from secular demand for compute acceleration in datacenters. However, key to our sell decision, we believe the market has discounted much of NVIDIA’s potential in the stock’s current huge valuation and would rather invest in less well-understood opportunities that have similarly dominant franchises but exhibit more attractive valuations."

Last month, we published an article revealing why Nvidia Corp (NASDAQ:NVDA) struck a deal to acquire Arm Limited from SoftBank Group for $40 billion.

In Q2 2020, the number of bullish hedge fund positions on Nvidia Corp (NASDAQ:NVDA) stock decreased by about 3% from the previous quarter (see the chart here), so a number of other hedge fund managers don't believe in Nvidia's growth potential. Our calculations showed that Nvidia Corp (NASDAQ:NVDA) is ranked #27 among the 30 most popular stocks among hedge funds.

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