Nvidia is one of the the worst performing semiconductor stocks this year, although the stock is hardly in the bargain basement.

After a 42% drop, the GPU maker is much cheaper than it was in the heady days of 2021, when its market capitalization was approaching US$1 trillion. Still, it’s still valued at 35 times forward earnings, rich both historically and relative to peers, especially at a time when revenue growth is expected to slow.

Nvidia’s plight is familiar to investors who have watched U.S. stocks tumble sharply this year under pressure from rising interest rates and concerns about slowing economic growth. However, the firm recently joined the ranks of chip makers that have warned of a slowdown in demand, emphasizing forecasts when they report second-quarter results on Wednesday afternoon.

“Nvidia is doing a lot of interesting things, and fundamentally we can’t turn our backs on them, but obviously we’d like to get some guidance on how long this lull will last,” said Daniel Morgan, senior portfolio manager at Synovus Trust. “Then you can look at the stock and say 35 times earnings is a great buy.”

The stock’s ratio compares with the average over the past decade of 29 times. It’s also in stark contrast to other chipmakers like Micron Technology, Qualcomm and Microchip Technology, which trade at about 12 times earnings. The Philadelphia Stock Exchange’s Semiconductor Index trades at nearly 16 times earnings.

Falling demand

Earlier this month, Nvidia released preliminary second-quarter results that showed revenue topping the company’s previous forecast by more than $1 billion. Management blamed falling demand for its gaming chips, but also acknowledged a shortfall in its data center business. Revenue growth is forecast to slow to just 13% this fiscal year.

“We’re still seeing unresolved inquiries about forward-looking demand,” said Wedbush analyst Matt Bryson, who has a neutral rating on the stock. “We are reluctant to be more constructive on the stock until we have more near-term visibility, even as we remain bullish on NVDA’s long-term trajectory,” he wrote in a note.

Retailers appear less reticent. The stock was the most popular among mom-and-pop investors in the week after Nvidia’s Aug. 8 warning, according to Vanda Research. Nvidia was the sixth most bought stock last week with the retail crowd pouring in more than $150 million. — Jaron Wittenstein, (c) 2022 Bloomberg LP

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