Street Calls of the Week: Nvidia gets a rare downgrade

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What’s the full story? Goldman upgrades ICE from Neutral to Buy, setting a 12-month price target of $167, indicating a 22% upside. After less than 10% EPS growth over the last three years, Goldman sees ICE’s EPS growth inflecting higher into the low teens in 2025 and beyond. This is supported by:

The research team expects the high incremental margin from ICE’s fastest-growing Exchange revenues to support approximately 100 basis points per year operating margin expansion. This, along with high free cash flow conversion, is predicted to drive a faster pace of de-levering and higher share repurchases by the end of 2024.

Goldman believes these dynamics are underappreciated, leaving them mid-single-digit above consensus (Visible Alpha Consensus Data) EPS at $6.14/$6.90/$7.88. As ICE’s top-line growth accelerates and the firm de-levers, Goldman sees room for valuation to improve from the current 21X next twelve months P/E to over 22.5X, implying 16.5X EV/EBITDA, which is in line with history.

Buy at Goldman means “Being assigned a Buy or Sell on an Investment List is determined by a stock’s total return potential relative to its coverage universe.”

How did the stock react? Intercontinental Exchange opened the regular session at $138.47 and closed at $136.93, a gain of 0.19 percent from the prior day’s regular close.

What happened? On Tuesday, UBS downgraded Pure Storage (NYSE:PSTG) to Sell with a $47 price target.

What’s the full story? UBS has downgraded Pure Storage shares from Neutral to Sell, citing an unfavorable risk/reward scenario. The analysts at UBS estimate a growth rate of approximately 8% over the next five years for PSTG, a decrease from the 16% growth rate experienced in the previous five years. They predict that PSTG’s market share in the all-flash sector will plateau at around 15%. Furthermore, UBS’s revenue forecasts for FY26 and FY27 are 6% and 10% below consensus, respectively.

The analysts have observed a decline in PSTG’s last twelve months market share of the all-flash storage market by about 80 basis points to 14.5%, as competitors like NetApp’s (NASDAQ:NTAP) C-series gain traction with enterprise customers.

Despite a 1% decline in revenue expectations for both FY25 and FY26, PSTG’s shares have surged approximately 83% year-to-date, outpacing the S&P 500’s 15% increase. This indicates that the stock’s appreciation has been driven entirely by multiple expansion to an elevated level of approximately 6 times EV/revenue.

UBS also notes that PSTG’s valuation has been overly influenced by optimistic views on AI infrastructure investments driving growth. However, the analysts believe that AI-related storage spending will likely grow slower than the market anticipates, with a greater focus on inference—a market segment with slower growth compared to training.

Furthermore, private vendors such as Weka, VAST Data, and Hammerspace are gaining market share, as demonstrated by Meta’s (NASDAQ:META (NASDAQ:META)) partnership with Hammerspace to develop and implement a parallel network file system in its GenAI clusters. This trend further supports UBS’s decision to downgrade Pure shares to Sell

Sell at UBS means “Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. FSR is > 6% below the MRA.”

How did the stock react? Pure Storage opened the regular session at $61.21 and closed at $62.74, a decline of 4.20 percent from the prior day’s regular close.

What happened? On Wednesday (shortened trading day in the US Markets), Citi downgraded Charter Communications (NASDAQ:CHTR) to Sell with a $255 price target.

What’s the full story? Citi analysts have expressed concerns regarding Charter’s financial outlook, citing increased risks to both earnings estimates and market valuation. They point to a challenging organic broadband landscape that is proving tougher than previously anticipated, which could impact subscriber numbers and revenue growth negatively over the next year. Analysts believe consensus expectations for Charter’s 2025 EBITDA may be overly optimistic given these headwinds.

In response to these concerns, the bank has adjusted its target price downwards, reflecting a contraction in the fair value-to-EBITDA multiple to 6.0x. This adjustment is based on Citi’s own projections, which predict lower EBITDA figures compared to market consensus for 2025. However, analysts at Citi acknowledge the potential for future free cash flow recovery once Charter navigates through its current phase of heightened capital investments.

Looking ahead, Citi views Charter’s upcoming second and third-quarter results as potentially unfavorable catalysts. They anticipate these earnings reports to underscore the challenges facing Charter, particularly in broadband pricing and subscriber volumes. The recent discontinuation of ACP (All-Channel Programming) is highlighted as a contributing factor to these headwinds, with analysts expressing skepticism about a near-term turnaround in this regard.

Sell at Citi means “The Investment rating definitions are: Buy ETR of 15% or more or 25% or more for High risk stocks; and Sell for negative ETR.”

How did the stock react? Charter Communications opened the regular session at $299.19 and closed at $301.25, a gain of 1.72 percent from the prior day’s regular close.

Thursday – US Market Closed

What happened? On Friday, New Street Research downgraded Nvidia (NASDAQ:NVDA) to Neutral with a $135 price target.

What’s the full story? New Street’s analysis indicates that consensus expectations suggest a robust 35% increase in GPU revenues by 2025, aligning closely with their earlier forecasts leading into earnings.

However, the brokerage perceives limited potential for further upside, citing insights gathered from the industry value chain. Consequently, New Street downgrades the stock to Neutral, emphasizing that significant additional gains would depend on a bullish scenario where post-2025 prospects notably improve, a development the brokerage currently finds uncertain.

Looking ahead, consensus projections anticipate a deceleration in revenue growth to the mid-teens, a trend that could be jeopardized by moderating hyperscale capital expenditures and potential market share gains by ASICs and AMD (NASDAQ:AMD). In this unchanged outlook scenario, New Street anticipates little additional upside for the stock, potentially even facing the risk of a valuation adjustment.

Currently trading at 40x next twelve months’ earnings per share, the stock previously saw its multiple decline to 20x during a period of slowed growth in 2019, rebounding to 35x more recently.

New Street values Nvidia at 35x earnings, reminiscent of late 2019 to early 2020 valuation levels. With an anticipated EPS of $4.1 by 2027 in their base case, translating to a target price of $143 by 2026, New Street’s one-year target price is set at $135.

Despite these metrics, the brokerage acknowledges the enduring quality of Nvidia’s business franchise, expressing readiness to recommend buying the stock again, particularly during extended periods of market weakness.

How did the stock react? Nvidia opened the regular session at $127.41 and closed at $125.83, a decline of 1.91 percent from the prior day’s regular close.