NVIDIA Corporation (NVDA) had forecasted a sharp drop in revenue for the third quarter, citing a weaker gaming industry. Moreover, analysts raised concerns about a slowdown in data center growth, which has supported chip sales.

In addition, NVIDIA said in an SEC filing in August that the U.S. government informed the company about a new license requirement for future exports to China, including Hong Kong and Russia.

Adding to the woes, global demand for semiconductors has taken a backseat. Amid widespread macro headwinds, the semiconductor industry is witnessing a demand slowdown. According to market research firm Strategy Analytics, demand for 5G phone chips might fall by 100 million units in 2022.

NVDA has gained 8.6% over the past month to close the last trading session at $138.34. However, it has lost 53% year-to-date and 44.5% over the past year. Moreover, despite such losses, the stock is still trading at a premium.

NVDA’s forward EV/Sales of 12.55x is 368.7% higher than the industry average of 2.68x. Its forward Price/Sales of 12.74x is 403.6% higher than the industry average of 2.53x. Also, its forward P/E of 77.44x is 255.6% higher than the industry average of 21.78x. Its forward Price/Book of 14.53x is 265.4% higher than the industry average of 3.98x.

Here is what could shape NVDA’s performance in the near term:

Weak Financials

NVDA’s revenue came in at $6.70 billion for the second quarter that ended July 31, 2022, up 3% year-over-year. However, its gross profit came in at $2.92 billion, down 30.8% year-over-year. Moreover, its non-GAAP income from operations came in at $1.32 billion, down 56.9% year-over-year.

In addition, its non-GAAP net income came in at $1.29 billion, down 50.7% year-over-year, while its non-GAAP EPS came in at $0.51, down 51% year-over-year.

Unfavorable EPS Estimates

Analysts expect NVDA’s EPS to decline 40.2% year-over-year to $0.70 for the quarter ending October 2022. Its EPS is expected to decrease 41.7% year-over-year to $0.77 for the quarter ending January 2023.

Moreover, its EPS is expected to fall 24.5% year-over-year to $3.35 in 2023.

POWR Ratings Reflect Bleak Prospects

NVDA has an overall rating of D, equating to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NVDA has a D grade for Growth and Value, consistent with its weak financials in the latest reported quarter and higher-than-industry valuation multiples, respectively.

The stock has a D grade for Stability, in sync with its beta of 1.71.

In the 93-stock Semiconductor & Wireless Chip industry, NVDA is ranked #82.

Click here for the additional POWR Ratings for NVDA (Momentum, Sentiment, and Quality).

View all the top-rated stocks in the Semiconductor & Wireless Chip industry here.

Bottom Line

NVDA reported bleak financials in its second quarter. The stock has slumped significantly this year and might decline further, given the weakening chip demand. Therefore, NVDA is best avoided now.

How Does NVIDIA Corporation (NVDA) Stack Up Against its Peers?

While NVDA has an overall POWR Rating of D, one might consider looking at its industry peers, Renesas Electronics Corporation (RNECF), Xperi Inc. (XPER), and STMicroelectronics N.V. (STM), which have an overall A (Strong Buy) rating and Photronics, Inc. (PLAB), which has an overall B (Buy) rating.

NVDA shares were trading at $135.89 per share on Monday afternoon, down $2.45 (-1.77%). Year-to-date, NVDA has declined -53.76%, versus a -17.51% rise in the benchmark S&P 500 index during the same period.

About the Author: Riddhima Chakraborty

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries. More...

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