Upping My Price Target on Nvidia, the Giant Groq Buy, Inflation Slowing?
Let's take a look at NVDA's planned $20 billion Groq deal, why I'm upping my target, and how increases in prices might be cooling.
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The rich got richer? Or did they? "They" sure are spending a lot.
News broke on Christmas Eve that Nvidia (NVDA) had entered into a non-exclusive licensing agreement with "Groq" for that nine-year old private firm's inference technology. Groq, not to be confused with Grok, which is an AI assistant and chatbot developed by Elon Musk's xAI, is a designer of high-performance artificial intelligence accelerator chips. As part of this deal, Nvidia will pay $20 billion in cash to acquire most of the company's assets aside from its Groq cloud business.
Groq founder and CEO Jonathan Ross and Groq Pres. Sunny Madra will be joining Nvidia under the terms of the deal. What's left of Groq will continue on as an independent company to be led by Simon Edwards as CEO. Edwards is currently Groq's chief operating officer. It was this past September that Groq had raised $750 million in new funds that valued the entire shop at $6.9 billion. That round was led by Disruptive. Participants included BlackRock (BLK) , Neuberger Berman, and DTCP. Other investors in Groq include Samsung, Cisco (CSCO) , Altimeter, and 1789 Capital (Donald Trump Jr's operation).
If completed, this would be Nvidia's largest acquisition ever, far surpassing the $7 billion purchase of Mellanox in 2019. Is this a smart purchase? Sounds like it. Is this a fair price? That's hard for me to say. Nvidia CEO Jensen Huang obviously seems to think so. Nvidia's cash position at the end of the third quarter was $60.6 billion, up from $13.3 billion in about a year and a half. The company is clearly investing in its business.
Huang wrote to his employees over the holiday, "We plan to integrate Groq's low-latency processors into Nvidia's AI factory architecture, extending the platform to serve an even broader range of AI inference and real-time workloads. While we are adding talented employees to our ranks and licensing Groq's IP, we are not acquiring Groq as a company.
Reaction on Wall Street
On Christmas Day, Robert W. Baird analyst Tristan Gerra, who is rated five-stars by TipRanks, reiterated his "Outperform" rating and his $275 target price on shares of NVDA. According to The Fly, Gerra wrote that "The announcement is in line with Nvidia's push into AI inferencing" Gerra's team added, "Baird's discussions in the AI supply chain point to expectations that Nvidia will retain a 70% market share of the AI market."
Baird believes that GPUs will retain a majority share of the AI processor market into 2030 and adds that custom application-specific integrated circuits could be accretive to Nvidia's forward-looking total addressable market.
The Fly is also reporting that Vivek Arya (Five stars at TipRanks) of Bank of America is also reiterating his "Buy" rating on NVDA shares as well as his target price of $275. Arya wrote "The deal involves a very different kind of hardware called language processing unit vs. Nvidia's 'well-regarded' graphics processing units' expertise."
Arya views the deal as "expensive but strategic."
Nvidia in Charts
Readers may remember this chart:
On Dec. 9, I wrote to you and explained that NVDA had survived a short sell-off coming out of the April-into-October "rising wedge" pattern of bearish reversal. We wrote then that within that larger pattern, there was a flat basing period of consolidation that produced a short rally. We put a $225 target on the shares that day. Now, take a look at this:
This morning, as with on Wednesday, the shares are engaged in an attempt to take and hold the $188 pivot created by the newly formed bullish double bottom pattern. The stock's reading for relative strength and its daily Moving Average Convergence Divergence are both also in a better place at this time. For that reason, I am going to raise my target price for Nvidia, though I remain more cautious than either Mr. Gerra or Mr. Arya. Then again, I actually have skin in the game.
Target Price: $235 (up from $225)
Pivot: $188
Add: Down to November low ($169)
Panic: Loss of 200-day SMA (currently $159)
Inflation Slowing Rapidly?
Last week, the November consumer price index hit the tape at annual growth of 2.7%, well below expectations for something closer to 3.1%. Many economists, including your author, were pleased to see those results, but honestly questioned if the data (given the holes created by the shutdown) was valid. It appears that not only was the data valid, but professional estimates for the current pace of inflation are dropping like a stone through water.
Not only has the Cleveland Fed, whose president is an inflation hawk, taken its expectation for December inflation below 2.6%, it has taken its projection for fourth-quarter annualized CPI growth below 2.5% and its projection for annualized Q4 Core CPI growth below 2.2%. In addition, Hedgeye's model, which is something I pay for and trust, now sees December headline inflation at less than 2.6% with a case for a print that lands below 2.5%.
Marketplace
Wednesday was a half day for financial markets, so I don't know how much we want to take away from it. That said, the "Santa Claus Rally" period got off to a mildly positive start (though the rally may have started in earnest a week earlier at the lows of Dec. 17th). The S&P 500 gained 0.32% on Wednesday, closing at an all-time high for a second consecutive trading session. The Nasdaq Composite added 0.22%. Small to medium cap equity indices were also up rather smallish.
Breadth was a little quirky. While 10 of the 11 S&P sector SPDR exchange-traded funds closed the half-day in the green, which is bullish, they were led by those defensive in nature, which is not bullish. The Staples (XLP) and the REITs (XLRE) led the way as defensive sectors took four of the top six slots on the daily performance tables. Two cyclical sectors, Energy (XLE) and the Materials (XLB) brought up the rear.
On Wednesday, winners beat losers by better than two to one at the NYSE and by a rough five to three at the Nasdaq. Advancing volume took a strong enough 63.7% share of composite NYSE-listed trade but just squeaked by with a 51.4% share of composite Nasdaq-listed activity. Obviously aggregate trading volumes made like a pea rolling off of a table, potentially rendering the day's price discovery close to technically meaningless.
Gang, get fired up. Let's do Friday.
Economics
(All Times Eastern)
1:00 p.m. - Baker Hughes Total Rig Count (Weekly): Last 542.
1:00 - Baker Hughes Oil Rig Count (Weekly): Last 406.
The Fed
(All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled.
At the time of publication, Guilfoyle was long NVDA equity.
