Morgan Stanley Downgrades Nvidia, Faces 'More Significant Challenges' Than Expected

Nvidia Corporation NVDA's concerning pre-announcement shows the company faces "more significant challenges" than previously expected, according to Morgan Stanley.

The Analyst

Morgan Stanley's Joseph Moore downgraded Nvidia from Overweight to Equal-Weight with a price target lowered from $220 to $148.

The Thesis

Nvidia's announcement that high-end gaming products fell short of expectations in the fourth quarter shouldn't come as much of a surprise but the magnitude of the miss is concerning, Moore said in the note. Expectations for a slowdown in gaming demand was evident in the back half of 2018 as "Fortnite" isn't particularly graphically demanding and "Red Dead Redemption 2" was a console-only release. In China, a slower approval process for games and a lack of hardware driving titles were also a factor impacting Nvidia's demand.

Moore said the gaming industry could see a recovery over the next year as DLSS support rolls out in the coming months and compelling ray tracing driven titles are introduced in the back half of the year. However, expectations for the sector to return to prior levels implies a more than 35 percent to 40 percent year-over-year increase by the end of the year which "seems optimistic."

Nvidia's weakness in HPC, cloud and other business segments was attributed to macro headwinds, according to Moore. Although macro headwinds are likely temporary it will nevertheless be "very challenging" to model a steady state of revenue moving forward even though Nvidia holds a clear competitive advantage over rivals.

Nvidia's business is likely to recover throughout 2019 but the "clear volatility" of the gaming business and cyclicality in other segments warrants a less constructive stance on the stock.

Price Action

Shares of Nvidia were trading lower by nearly 2 percent at $136.06 Tuesday morning.

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