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Stocks  | October 12, 2020

In a bold contrarian call, New Street Research analyst Pierre Ferragu issued a Sell recommendation on Nvidia’s shares, setting a one-year price target of $400 that would imply a loss of more than a quarter of the chip maker’s valuation.

Nvidia shares have rallied 135% this year, as the company continued to see strong growth in its two primary markets: 3D graphics chips and processors used in data centers for parallel processing. Ferragu sees a reversal coming.

“Nvidia has clearly won these franchises, securing strong earnings power and strong growth,” Ferragu wrote in a research note. “This makes it difficult to look at downside risks, but it is also our job to anticipate when expectations, sentiment and valuation on such great names can lead to disappointments.”

The analyst says that while “Nvidia has become the undisputed leader of both franchises ... [it] still monetizes its ecosystem through product cycles. As all category leaders in semiconductors, Nvidia competes mostly against itself, bringing to the market new products with such improved capabilities that they trigger steep replacement cycles. Our analysis suggests strong cycles in both datacenter and gaming are likely to peak in the next six months. This means we should expect another strong quarter and guide, and after that, it is likely overheated expectations will lead to disappointment and a correction in the stock.”

Ferragu says this is a long-term call. He argues that “news flow, numbers and guidance” will likely drive the stock marginally higher through year-end, providing “an opportunity to take profits or tactically short the stock in the first half of 2021.”

He expects the company’s valuation to revert to about twice the S&P 500 multiple on next 12 months earnings, from about triple the S&P multiple now. He notes that would imply a valuation of about 40 times earnings, still higher than any other mainstream chip company other than Advanced Micro Devices (AMD).

Nvidia shares were down 0.7% to $549.58 in afternoon trading.

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