NVIDIA's Crazy Run Begins To Slow Down

NVIDIA Corporation NVDA, which was range bound between the $15 and $23 levels for over four years, broke out of the range in September 2015. Thereafter, the stock witnessed a breathtaking rally, which saw its shares gain 274 percent since the end of September 2015.

Steep Ascent Around Stellar Q3 Results

The stock had climb very sharply around its third-quarter earnings release in mid-November. The company's revenues rose over 40 percent sequentially and 54 percent year-over-year to $2 billion. Contribution-wise, gaming revenues accounted for 62 percent of the total. In terms of growth, the stand out performers were gaming and datacenter, with sequential growth rates of roughly 59 percent each.

Following the release of the results, sell-side analysts went gaga over the company. Barclays raised its rating on NVIDIA to Equal Weight from Underweight and lifted its price target to $72 from $54. Jefferies reiterated its Buy rating on shares, while it raised its price target to $95 from $80. BMO said it continues to rate NVIDIA a Market Perform but raised its price target to $75 from $59.

What Has Driven The Rally?

The company has defied the vagaries of the semiconductor market and has been consistently delivering better than expected results. The graphics chipmaker is the leader in the GPU market, having a 80 percent share compared to Advanced Micro Devices, Inc. AMD's 20 percent. The company has also expanded horizontally by creating an ecosystem around its graphics card, thus appealing to customers and investors with its innovative technological offerings.

Pricey Valuation: A Key Risk

That said, analysts have also raised concerns about its astronomical valuation. Although unambiguously subscribing to the theory that the company's growth prospects are bright, especially in the data center, auto and gaming segments, analysts feel any negative development or disappointment, however, trivial, may set the stock on course for a correction.

Apparently, this risk has materialized, as the stock is down close to 5 percent on Thursday. There are whispers that the announcement from Amazon.com, Inc. AMZN's AWS concerning the launch of a new instance type with Field Programmable Gate Arrays, or FPGAs, which lets you reprogram quickly and adapt them for specific application, has set some traders worrying over competitive threat.

These are supposed to be faster than the GPUs and has among their components Xilinx, Inc. XLNX UltraScale+ VU9P fabricated using a 16 nm process. Accordingly, buy side analyst are fearing that Amazon can give NVIDIA a run for its money, giving competition for its data center business.

Is Thursday's move a mere pullback or is part of an extended correction? Given the fundamental strength, the stock has the potential to bounce back with even greater vigor.

At last check, NVIDIA shares were sliding 4.66 percent to $87.91 on roughly 1.5 times their average volume.

Image Credit: Coolcaesar at English Wikipedia [CC BY-SA 3.0 or GFDL], via Wikimedia Commons