The Hottest Stock Of 2016 No Longer A Buy For This Analyst

NVIDIA Corporation NVDA, one of 2016's hottest stocks, has been downgraded by analysts at Instinet — a Nomura company.

Instinet's Romit Shah downgraded Nvidia's stock to Reduce from Buy with a price target lowered to $90 from a previous $100, mostly due to the underappreciated slowdown in gaming and the corresponding negative impact to the stock's multiple.

Justification For Downgrade

Shah explained Nvidia's business could be viewed as two franchises. The first is the Core business and consists of gaming, professional visualization, and OEM & IP. The other segment, Emerging franchise, comprises of Nvidia's ambitions in datacenter and automotive.

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The problem is the core segment is still notably larger and is expected to generate $6.1 billion in revenue in fiscal 2018 versus just $1.9 billion for the emerging segment.

Shah continued that Nvidia's stock typically traded at a 10-year average multiple of 2x EV/sales, which represents the historical value of the core franchise. However, a 5x EV/sales multiple better values the segment given the company's competitive position and higher gross margin versus its peers.

Unfortunately, the analyst's multiple also implies that the datacenter and automotive business are being valued at around 20x sales, "well in excess" of its datacenter, automotive and software peers who all trade at less than 10x EV/sales.

Potential And Performance

Finally, Shah did acknowledge the tremendous potential of Nvidia's datacenter and automotive business and these will be "solid long-term growth drivers," but the math dictates the valuation the market assigns to these businesses is "unsustainable."

Image Credit: By The Conmunity - Pop Culture Geek from Los Angeles, CA, USA - CES 2012 - NVIDIA, CC BY 2.0, via Wikimedia Commons