NVIDIA Corporation (NASDAQ:NVDA ) is a formidable technology company specializing in gaming and data center products. We previously published a negative piece on Nvidia on SA, citing its over-exposure to crypto mining. Following last week's F2Q23 results , we remain bearish on NVDA and believe there is more downside for the stock from the current levels, primarily driven by weakening demand for data center products and the glut of GPUs in the secondary markets and in the channels.

Our bearish thesis is based on our belief that the stock pullback will continue as gaming demand remains weak and data center demand slows down materially. We believe the stock's 46% drop YTD is due to its exposure to GPU-related sales and Ethereum's switch to Proof of Stake (PoS), which no longer requires GPUs to mine crypto. We believe weak GPU demand will continue due to channel inventory and as Ethereum completes its transition to PoS in September. However, we expect more downside as demand for data centers also normalizes. While we are bullish on the company's long-term prospects, we believe the company still has more downside ahead and recommend investors sell the stock at current levels. We will revisit the NVDA story as we seek positive inflection in its business.

We called out NVDA's exposure to GPU-related sales earlier this year, and last week's earnings confirmed our belief as gaming revenue fell 44% sequentially. We believe NVDA's gaming sector has no meaningful growth catalysts as Ethereum completes its switch from Proof of Work (PoW) to Proof of Stake. The transition will allow individuals to mine crypto without the use of GPUs. We believe the transition has depressed NVDA's GPU sales significantly and caused the gaming revenue to drop steeply. The following graph maps out NVDA's stock against Ethereum's hash rate to reiterate NVDA's exposure to crypto-mining-related GPUs and its decline without crypto-related GPU sales.

We believe the weakened demand has created excess channel inventory for GPUs. NVDA's exposure to crypto-mining-related GPU sales is around $1.5B per quarter. We don't expect the gaming demand that once was to return as Ethereum announced they would be solidifying their transition to PoS in September. We believe NVDA GPU sales will also be hurt by reselling once crypto-mining GPUs into secondary markets. We believe NVDA will continue to face the repercussions of its crypto exposure and maintain our belief that NVDA's worst days are not behind it yet.

We do not believe NVDA's data center segment will be able to offset the gaming decline because we believe data center demand will likely slowdown in the coming quarters. We believe the weakening consumer spending is catching up to data centers. Sluggish demand for smartphones and PCs has weakened demand for cloud services (whether it's cloud-based services, entertainment, or offices). We also believe supply chain issues are triggering a Toilet Paper Effect regarding data centers. Supply bottlenecks are making companies double order more than they will need in the near term. We believe NVDA's next most significant challenge will be the slowdown of data center demand.

In last week's earnings call, CEO Jensen Huang attributed the weaker-than-expected 1% sequential growth in data centers to lower sales to "China hyperscale customers." We expect a similar situation with hyperscale customers in other geographies, eventually. We believe the coming data center slowdown was understated in the call, and it will be another shoe that will likely drop over the next few months.

While data center and gaming markets have solid prospects in the long run, we believe macroeconomic headwinds are beginning to bite in the near term. The competition between Nvidia and Advanced Micro Devices (AMD) continues to heat up following AMD's acquisition of ATI. AMD combines the CPU and parallel graphics processing engines onto a single chip. AMD chips are now powering Sony PS4 PlayStation, Nintendo's Wii U, and Microsoft's Xbox One. In addition, AMD's acquisition of Xilinx poses a severe challenge to Nvidia's position within the data-center chip market. Xilinx's AlveoAI accelerator cards are being used in HPC applications such as real-time machine learning, data analytics, video processing, and genomics.

With AMD executing well on both its products front and sales front, we believe NVDA's business is at risk. With Nvidia trading at a higher multiple than AMD, there is no room for error in Nvidia's execution.

Over the next two to three quarters, we expect enterprise data centers and hyperscale cloud customer demand to slacken. Many software companies such as Splunk (SPLK), Microsoft (MSFT), Workday (WDAY), and ServiceNow (NOW) have already noted increasing deal scrutiny and elongated deal cycles. We do not believe any software/hardware vendor is immune to demand weakness, as companies are becoming conservative with their IT purchases.

Despite having one of the best portfolios in the industry, we expect the demand for Nvidia's data center products to lessen over the next few months. In addition, the pandemic drove the PC shipments from around 260-270 million units to over 330 million units, as many employees switched to working from home. As the pandemic began to ease, we expect the PC unit shipments to revert to their historical mean of around 270 million units per year, pressuring the graphics card shipments.

We expect Nvidia to lower estimates again next quarter, pressuring the stock. Therefore, we recommend investors wait for the dust to settle and a better entry point before they buy shares in Nvidia

Despite weaker outlooks for the October quarter, NVDA stock is still expensive. On a P/E basis, NVDA is trading at 35x C2023 EPS $4.51 compared to the peer group average of 15.9x. The stock is trading at 12.9x EV/C2023 sales versus the group average of 4.4x. We believe the impending data center weakness is not priced into the stock yet. We expect the stock to pull back even further as demand headwinds continue to materialize and recommend investors to sell while they can.

The following chart illustrates the semiconductor peer group valuation.

Wall Street's sell-side is still overwhelmingly buy-rated on NVDA. Of the 46 analysts, 37 are buy-rated, and the remaining are hold-rated. We believe sell-side ratings are too optimistic to assume that NVDA's weakness is priced for further downside. NVDA is currently trading at $158, and we expect it to pull back further. We would not be surprised to see the stock at $125 levels in the next few weeks/months. The median sell-side price target is $215, and the mean at $216, with a potential 36-37% upside.

The following chart indicates NVDA stock's sell-side ratings and price targets:

We expect more downside ahead for NVDA as the data center, and gaming weakness materializes. NVDA faces depressing sales in its biggest segment, gaming, as Ethereum transitions to PoS, and channel inventory will likely pile up. We do not see GPU demand rebounding meaningfully in the next two quarters. However, our newest concern for NVDA is demand slowdown in data center is due to double ordering. We expect the stock to pull back from current levels and strongly recommend selling.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.