Nvidia—18 Quarters of Accelerating 40% annual growth is over

And we thought the out of the $180 Put options were too expensive—aargh!


Dear Subscriber,

Well, we thought the crypto collapse was already priced into the correction--it was not. Just like AMD--which crypto mining was an even smaller percentage. 

We found the $180 December Put options to expensive to put on--15% price swing was priced in up or down.



What I was afraid of two years ago with Nvidia (a slow down in the rate of growth of the rate of growth curve) was wrong two years ago but happened this quarter-- so I was just early--crap. 

My selling rule has always been to close at least 50% of any position when we get to 90% of our target--that is why we sold our Nvidia the first time with 200%+ profits. When our analysis turned out to be wrong, we reloaded Nvidia and rode it another 150%--but we got to 10% of $300 target and we should have followed the rules.

This time we didn't sell Nvidia at $270--and that was costly stupidity on my part--- it's my call. Undoubtedly muscle memory from first sale. 

I apologize. We did follow the rules on AMD and that turned out fabulous--but as I learned running a hedge fund and mutual fund for years..."what have you done for me lately?"

1) The Crypto mining crash was obviously NOT priced in. Even though those sales were 3-4% at most, they exploded in 2017 and the first half of 2018. The price crash of Bitcoin ended that. NVDA now estimates negligible crypto sales in 2019.

2) The data center sales slowed a bit--but not enough to warrant a 40% haircut from October 10 chart up top.
We are looking deeper into this--one of the reasons we are doing so well with Xilinx is their programmable chips are gaining share in data center AI systems. Google and Facebook have also created their own AI chips--the big Kahuna Amazon and Microsoft are still 100% Nvidia for AI in the cloud. 
3) The transition to Turning GPU cards is going faster than planned, and they are another breakthrough in performance, but the primary target is e-gaming and the e-publishers are in the process upgrading their software to use Turing's amazing lifelike rendering process 1000 times faster than the last Pascal version that the crypto folk are selling into the secondary market hence the inventory glut.

Action to Take:  HOLD and buy under $170. The long-term thesis minus crypto still holds. Nvidia is a 4-6 month inventory work out and Turning adoption story. We have to bring the target valuation down to $225 from $300. $162 area held this am--that was good to see. As in any wipeout of a price momentum stock, the support will be where REAL buyers--who are buying for a year or more--i.e., they see 25%+ appreciation ahead in 2019.

It will take 3 trading days to swap out the last momo players with real tech growth players--but the volume 90 minutes into trading is massive-- it's going to trade 25% of its float today it looks like. THOSE are investors.

I agree with analyst Bill Stein at Sun Trust. "Long-term thesis seems intact; Buy the dip," said William Stein, an analyst at Suntrust Robinson Humphrey. "The surprisingly weak Q4 guide appears temporary. NVDA guided Q4 ~20% below consensus revs as the company halts ~1/3 of gaming segment sales to flush channel inventory built during the crypto enthusiasm in 1H18. This badly damages near-term revenue and profits, but Datacenter, Pro-Viz, and Automotive results support our structural 30% CAGR growth view."

"Crypto reset - still a top secular growth story," said Jefferies analyst Mark Lipacis. "October quarter missed, but the January quarter Revenue/EPS outlook is 21%/36% below consensus due to high crypto GPUs in the channel. We forecast JanQ gaming GPU revs decline by 35% QQ as NVDA clears channel inventories. We lower our ests and price target, but model gaming revs resume QQ growth in the JulQ. The JanQ reset is a setback, but we continue to view NVDA as a top play on secular themes in AI, Gaming and A/V."

If you have losses and want to use them to wash other gains--feel free--Nvidia price will flop around for the next 4-5 trading days as more research comes in.

But under $170 its a buy with $225 target Jan 2020.


Updates/AlertsTobin Smith