As the patina of growth potential fades from Nvidia (NVDA) semi speculators might need new targets.
Nvidia's stock plunged on Friday after reporting a disappointing quarter and guiding to more trouble ahead amid unexpected inventory issues, damaging management's credibility in the eyes of the market. Nvidia shares dropped 19% to $164.43 to end the day.
"Last quarter [CEO Jensen Huang] said 'we are masters at managing our channel', which turned out not be the case," Bernstein analyst Stacy Rasgon told Real Money. "Management credibility definitely took a hit after this quarter."
He explained that the company, and a large amount of the overall sector, "got out over its skis" and will take a few quarters to normalize and for the market to regain trust in Huang. He reiterated that he believes in the long term story at Nvidia and is maintaining his "Buy" rating, but noted it will take time for the stock to settle.
As such, he and other analysts are offering some tactical plays in the slowdown in semis at present.
"Broadcom is super cheap," Rasgon said, noting its forward-looking PE ratio sits at 10.8 alongside its strong performance since the summer. "It's probably going up."
"AVGO's business franchises are very solid with significantly increased free cash flow available for M&A and cash return, but an un-telegraphed shift to apply the company's successful semi M&A strategy to software is generating some investor angst at the moment," Rasgon wrote in a research note provided alongside the interview. "Nevertheless, we believe a strong case for upside from current levels exists."
He set an "Outperform" rating with a $275 price target for the stock based on its potential.
Deutsche Bank analyst Ross Seymore was also positive on Intel given its valuation, trading at a price to earnings ratio half that of Nvidia even at its lower level on Friday.
An associate on his team added that in a market downturn, investors will need to be selective in the sector.
Medicine Goes Down
One thing that Rasgon pointed out as a deft move by the beleaguered Nvidia was its severe forecast cuts.
"Well you can't go lower than zero," he joked, referencing the company's mid-end desktop GPU shipments being cut completely for the fourth quarter.
Rasgon explained that the cut of the forecast positions and sales estimates will help the company recover, given that a second straight miss would be much more damaging.
"It's good that they're just going to take their medicine all at once," he said. "That's probably the healthiest thing to do."
Rasgon used Texas Instruments (TXN) as an example of a company that cut its forecasts and swallowed its medicine at once.
"Shares are trading at the lower end of their history vs the S&P, and execution remains stellar with cash return continuing to offer support," Rasgon said.
He remains confident in management that has slated a strong buyback program moving forward, and is encouraged by the company's trajectory since its late October free-fall
"We believe it's worth waiting for," Rasgon said, setting an $115 price target and an outperform rating.
If you must be in the space in the near term, tactical plays on valuation and priced in cuts may offer attractive opportunity.
-- This article, originally posted Nov. 16, has been updated for Nvidia's closing price on Friday.