Dear Subscriber,

Nvidia is now at significant risk of missing its forecast numbers for Q1 sales and Q2 forecasts.

At a 36 P/E it has no room for error...and NVDA has turned into a trading stock (and this is not a trading service.) Let's take our glorious 250%+ profits and wait for an opportunity later to repurchase.

Here is the core of my new analysis on Nvidia: 

• The Technical Support level for Nvidia has made $95 the red line in the sand and has been hit twice (which weakens it).
• It's been trading within limited consolidation range for two months
• As negative fundamentals increase their influence, Nvidia is at risk of going into downward correction.
• Alphabet threatens disruptive innovation in processor market.
• Competition from AMD, Xilinx, and Intel mounts

BMO Capital Markets is the second firm in several days to downgrade Nvidia, citing bloated channel inventory.

If confirmed by the company on its next conference call, then future growth forecasts will not be what the market expects.

BMO Capital Markets said it expects graphics cards dropping 16% Q/Q in calendar Q1, a steeper decline than the seasonal 6% average. The culprit seems to be channel inventory, which is bloated.

As a reminder Pacific Crest suggests a 30% to 40% (q/q) reduction in Chinese sell-through, and a 20% q/q reduction in US sell-through.

One can argue however that NVDA is not just about gaming and graphic cards, and it still has the auto and datacenter segments that will provide for ample growth.

While I do not discount the importance of the datacenter and auto segments, the truth is that revenue from these two segments are not enough to compensate for a slowdown in graphic card sales.Gaming represents almost 60% of total revenue. Not only that, but revenue increase from gaming, on a percentage basis, was about the same as datacenter revenue increase. Which means that the main driver of growth for FY'17 was gaming, and not all the other segments that occupy most of the headline news these days..

Therefore, we're now revising our consumer graphics/OEM revenue lower to reflect BMO's channel supply chain checks. Hence, our estimates on graphics revenue is revised lower from $1.268 billion and $1.002 billion to $883.13 million and $713.82 million for Q1'17 and Q2'17.

Our full-year CY'17 estimate for both consumers graphics, and OEM is revised from $5 billion to $3.956 billion, which implies NVDA's graphics revenue in consumer/OEM will decline by 10.4% y/y versus $3.956 billion (prior year).

This changes everything for NVDA going forward. It basically means that the only source of meaningful revenue growth for NVDA in CY'17 is the datacenter segment.Yes the auto segment also will grow, but not enough to make an impact on NVDA's overall revenue mix. I do not expect the auto segment to provide the revenue volume needed to make a very big difference to Nvidia's revenue mix until 2020.

One answer for the shortfall might be intense competition from another big 300%+ winner for uns Advanced Micro Devices (NASDAQ:AMD) which Goldman Sachs gave a sell rating too last Friday (I'll get into this report later but AMD is STILL an $18 target.

I am not going to get into a graphic card comparison, however it is the only logical explanation. Yes both companies have introduced many new cards over the past several quarters, however AMD has put on the heat with a product mix that is priced lower.

What all this means is that NVDA will probably not grow by 16% for FY'18 that analysts are forecasting, but less. It also probably means that Fy'19 12% growth forecasts also will be lower.

When you add all this up, this scenario means that price targets for NVDA going forward will come down by a lot, if the gaming revenue shortfall due to a bloated inventory is confirmed on the company's next conference call. 

Bottom line

NVDA currently has a trailing P/E of 38 and a 12-month forward P/E of 28. You have to ask yourselves if any stock that will grow by 16% is worth such valuation. For me it isn't. IF BMO's channel investigation is correct, growth will be a lot less than 16%.

I see a LOT of risk that analyst price targets will come down like a rock.

Le'ts sell our two NVDA positions and take GLORIOUS long term profits. $25,000 invested in NVDA from our past buy recommendations is worth nearly $160,000 today...that is an amazing return for 14 months in a stock.

PS: We are reviewing ALL our positions and sectors but so far Nvidia is the first flat out sale.

- Toby

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