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Stocks  | January 21, 2019

The worst may not be over for Nvidia (NVDA) as prices for its graphics processor units (GPU) continue to fall. It gets even worse when throwing in a weak technical chart and options market that's betting on shares falling further.

Now there are reports that Nvidia is shifting attention away from its highly touted artificial intelligence and autonomous driving advances. The focus appears to be moving back to its GPUs in perhaps a sign it's losing its dominance in the market place. It all spells trouble for Nvidia and its future outlook as fourth quarter earnings approach.

Unwelcome news came on Jan. 17 when Taiwan Semiconductor (TSM) provided weak first quarter guidance, adding additional weight on an already weak chip sector. The company noted, "we anticipate our business will be dampened by the overall weakening of the macroeconomic outlook, mobile product seasonality, and high levels of inventory in the semiconductor supply chain."

How much of this relates to Nvidia isn't exactly clear, but it's worth noting that Taiwan Semiconductor does produce GPUs for Nvidia. The article indicates that Taiwan Semiconductor is working on Nvidia's newest GPU, the GTX 2080 Ti.

Why might this be bad? Because Taiwan Semiconductor is producing the same GPU, we noted in our December commentary, which was seeing a steep decline in prices. At the time it was pointed out that GeForce GTX RTX 2080 Ti Founder's Editions had fallen from around $1,800 to $1,400. Now that same GPU is selling for $1,339. Worse, the Nvidia GeForce GTX 1070 Founder's Edition was selling for around $500 in December, now that GPU sells for just $399. It's a sign that perhaps the demand for Nvidia’s GPUs is continuing to weaken.

Lowered Expectations?

Despite declining GPU prices, analysts' consensus revenue estimates have remained unchanged since the company’s third quarter results in November. It may be an indication that expectations for the fourth quarter and the first quarter have not fallen, and weaker GPU prices have not been factored into the outlook.

Growth?

What may be another worrisome sign is an article on Jan. 16 from Digitimes which would suggest that Nvidia is now refocusing its business to its latest GPUs, a sign the company may be seeing rising competition.

Based on the current revenue trends for Nvidia, it may very well be the case. The company has seen its gaming revenue flatline since the fiscal fourth quarter of 2018.

(Data from Nvidia, Chart Mott Capital)

The growth for the segment dropped to the slowest pace in the fiscal third quarter at 13%.

(Data from Nvidia, Chart Mott Capital)

Technical Chart

The chart for Nvidia continues to suggest weakness may lie ahead for the stock. Nvidia has been unable to break out and rise above technical resistance at $151. Additionally, the RSI continues to trend lower and still suggests that momentum is leaving the equity. The chart would indicate that the stock could fall back to $139.50.

Bearish Options

The options market does have a bearish tilt based on expiration on June 21. The puts at the $150 strike price outweigh the calls by about 2 to 1. There are roughly 5,600 open put contracts to just 1,750 open calls.

Risks

There are risks here because in our previous article we noted that the technical chart was weak and that the stock could drop further should it fall below a price of $121. The stock never reached that price and instead stopped falling at $124.50 only to rally to roughly $150. The same case could very well be valid once again. If Nvidia rises above $151, it could go on to rally to approximately $160.

Additionally, measuring the prices of GPUs isn't a clear indication of what Nvidia's revenue could be. Lower priced GPUs could result in more units being sold, and if there are enough units sold at a discount, it could be enough to offset the price decline when it comes to overall company revenue.

What Now?

There are clear warning signs that would suggest the worse for Nvidia may not be over. While the stock, for now, seems to have stabilized, it surely does not mean it's out of the woods given the red flags.


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