Nvidia shares at a 3-month low as hedge funds short the stock like crazy
Shares of Nvidia (NVDA), which gained over 200% in 2016, are now trading at a three-month low after a 9% drop on Thursday.
This drop in shares of the chipmaker came after a downgrade of the stock from Romit Shah at Nomura, who cut his rating to Reduce from Buy and put a $90 price target on shares. Early Friday, the stock was little-changed and trading just above $100 per share.
Earlier this month, Nvidia shares also appeared on Goldman Sachs’ latest roundup of the stocks hedge funds are shorting the most. As of January 31, about 7% of Nvidia’s market cap, or $4 billion worth of stock, was being sold short. This made the stock the second-most shorted by market cap among hedge funds tracked by Goldman.
Among stocks in the top-10 most shorted by hedge funds tracked by Goldman, only Caterpillar had 5% or more of its total float sold short. This means, simply, that as a percent of the shares outstanding, Nvidia shares are being most aggressively bet against among the biggest hedge fund shorts out there.
Short-seller Andrew Left at Citron Research, who back in late December said he was short shares of Nvidia, said Friday he covered his position as the stock is now trading closer to his $90 price target.
In an interview with CNBC on Thursday, Shah said the real concern for Nvidia in the coming quarters is revenue growth in its core gaming business decelerating faster than Wall Street expects. This business accounts for about 60% of the company’s revenue.
Much of the hype around the stock in recent quarters has been in its datacenter and automotive business, in which the company’s smart chips are seen as making it a leader in artificial intelligence and autonomous driving. In 2016, Yahoo Finance named Nvidia its company of the year.
“They had terrific results in datacenters and automotive,” Shah said Thursday, “but the company’s core business is in gaming… This company trades at a very large multiple, and unless they’re firing on all cylinders you’ve got to believe there’s downside [for the stock].”
Shah added that he thinks longer-term the right range for the stock is between $75 and $100 per share. In its most recent quarter, Nvidia reported revenue in its gaming segment of $1.35 billion. In the current quarter, Shah expects gaming revenue to fall sequentially to $1.105 billion, an 18% drop and below Wall Street’s forecast for $1.118 billion.
In a note to clients out Friday, UBS analyst Stephen Chin reiterated the firm’s Buy rating and $132 price target on shares, highlighting expectations for datacenter sales to double over the next couple years while arguing that the upcoming Nintendo Switch could generate incremental revenue gains of up to 8% by its fiscal year 2020. (Nvidia just completed its fiscal 2017.)
But as Shah noted on Thursday, three times in the last decade, Nvidia shares have run up on expectations for an emerging business unit only to eventually be re-rated.
“Furthermore, we observe that the market’s confidence in NVDA’s emerging businesses has fluctuated in lock-step with the performance of the gaming business (60% of sales),” Shah wrote.
“In other words, we’ve found that when gaming exceeded expectations, the market assigned higher value to Nvidia’s emerging businesses, resulting in multiple expansion. Conversely, when gaming contracted, we believe the market became less enthusiastic, resulting in multiple compression.”
And so with Shah calling for a contraction in Nvidia’s core gaming business, the rest of its business — no matter how successful it may be in time — sees expectations tamped down, too.
—
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
Read more from Myles here:
