"Nvidia Selloff Is an 'Overreaction,' Analyst Says. The Stock Is Still a Buy"
8:35 am ET September 2, 2022 (Dow Jones)
By Sabrina Escobar
"Shares of Nvidia fell nearly 8% on Thursday after the chip maker said the U.S. government had imposed new licensing requirements for advanced chip sales to Russia and China. That may be an "overreaction," said analysts Jefferies.
"We view the 8% selloff in the stock yesterday (vs 2% SOX) as an overreaction, and view the recent weakness as a particular buying opportunity," wrote analyst Mark Lipacis.
The new license requirement is meant to address the risk that chips manufactured by U.S. companies could be funneled for "military end use" in China and Russia. Nvidia (ticker: NVDA) said it didn't sell to customers in Russia, but the requirement could impact $400 million in third-quarter sales to China.
Lipacis doesn't believe the restriction will be a permanent risk for Nvidia's revenue. For one, he said, older products don't need a license for sales into China, and many cloud players still prefer to buy units from previous generations.
In addition, he wrote, most of Nvidia's chip sales would go to companies such as Alibaba Group Holding ( BABA), Baidu ( BIDU) and Tencent Holdings ( TCEHY), none of which are military, making it likely that the company should be able to get a license for their sales. The bigger hit would be to sales made through distributors where the end consumer is not as clear, he added.
The analyst reiterated a Buy rating and $280 price target.
But for Needham Securities analyst Rajvindra Gill, the government's new stance presents a "significant headwind to the business." Gill lowered his revenue estimates for the company's data center business to to $3.6 billion from $4 billion, and cut his price target on the stock to $170 from $185.
He estimated that China's data center represents about a quarter of total data center revenue now, making a slowdown in the Chinese market particularly risky for Nvidia. It doesn't help that the Chinese economy has "deteriorated significantly" and could keep slowing down throughout 2022.
Daiwa Securities downgraded the stock to Neutral from Outperform on Friday. Analyst Louis Miscioscia also slashed his price target to $133 from $215, saying Nvidia's current valuation was too high given the new restrictions, weak quarterly results, and lower growth potential.
Nvidia stock was dipping 0.2% to $139.08 in premarket trading on Friday. The shares lost 7.8% on Thursday, and have decline 52% this year."