Nvidia stock faces potential 20% crash, warns Private Equity Firm

After posting another beat on earnings in its Q2 report on August 28, Nvidia (NASDAQ: NVDA) stock surprisingly experienced an 8% drop in after-market trading, with analysts from Musketeer Capital Partners warning that this may be just the beginning of a more significant downturn.

After posting a double beat on its earnings expectations, NVDA stock experienced a decline in value, potentially spurred by the lower beat on earnings compared to the previous quarters and a somewhat constrained forecasted growth.

NVDA shares recovered some of the losses in the pre-market and seem bound to open trading on August 29 at a valuation of $121.3.

Josh Koren, a seasoned investor and founder of Musketeer Capital Partners—a private equity firm known for its strategic investments in the tech sector, which currently doesn’t hold Nvidia stock in its portfolio, believes that the semiconductor maker may experience trouble in the upcoming quarters.

Namely, the founder of Musketeer Capital Partners sees a 20% drop in NVDA shares in the distant future as the revenue and profit expansion from capital expenditure guidance slowly deteriorate, as the expert revealed his arguments in a CNBC interview on August 28.

Musketeer Capital’s CEO bases his arguments on the potentially diminishing capital expenditure from Nvidia’s largest customers, as they could seek cheaper alternatives or even develop custom microchips better tailored to their needs.

Koren said, “I wouldn’t be surprised to see it (profit decline) happen maybe within the next two or three quarters, and when that does happen, it could push Nvidia’s share price down 20% or more.” 

What is the relation between capital expenditure and Nvidia stock price

Capital expenditure, or capex, from leading hyperscalers like Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), and Amazon NASDAQ: AMZN) is a key indicator of industry trends from the major players in the sector as it highlights interdependence and possibility of a domino effect from any potential shifts in the current status quo.

Recent earnings reports from several major technology firms for the June quarter reveal a significant increase in spending, particularly in artificial intelligence (AI), which encompasses the graphics processing units designed by Nvidia. 

These top cloud computing companies have been expanding their infrastructure to support the training of AI models. Microsoft reported a 77% year-on-year increase in capex for the June quarter, reaching $19 billion. 

Similarly, Alphabet disclosed a capex increase of over 90% compared to last year. These tech giants have indicated that substantial investment in AI is expected to persist, and as long as it does, the semiconductor maker doesn’t have a reason to worry.

However, the slightest indication of diminishing capex expenditure could hurt Nvidia and its stock, especially considering that Alphabet and Microsoft are among microchip producers’ largest customers. Together with Meta Platforms (NASDAQ: META), they make up roughly 40% of the company’s revenue.

Wall Street remains optimistic about Nvidia’s Q2 earnings

As revealed by many new and revised price targets from the large Wall Street institutions post Q2 Nvidia earnings, analysts remain relatively confident about the chipmaker’s prospects in the next 12 months.

The lowest price target has risen from $115 to $140, marking a $25 increase. The median price target has also seen a modest rise, moving from $144 to $150, while the highest price target has climbed from $165 to $175, a $10 increase. 

There have been 17 revisions, with 10 analysts raising their targets and seven maintaining their previous estimates.

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