Nvidia (NVDA) closed down 0.5% during the 11/30 trading session (and down 2.8% from the week's peak), underperforming the Nasdaq (QQQ) which was down merely 0.06%. More interestingly, rivals Intel (INTC) and AMD (AMD) were up 0.18% and 7.84%, respectively. The movements surrounding Nvidia's stock generally seem to be "random," but the stock really does seem to move on subtle fundamental catalysts that can sometimes be puzzling to spot. So, what drove it down this time?
Surface RT Orders Slashed In Half
One of the biggest design-wins for Nvidia's mobile applications processor - the "Tegra 3" - was in the Microsoft (MSFT) "Surface RT" tablet. According to a report from Digitimes, orders for Microsoft's brand-new Tegra powered tablet were slashed in half from 4M to 2M units for 2012. Nvidia's big push in the tablet space has focused on the opportunities afforded to the ARM (ARMH) ecosystem with "Windows On ARM" (Windows RT) and Google's (GOOG) Android. Unfortunately, it seems that Windows RT is more-or-less "dead-on-arrival." According to the Digitimes report,
The sources pointed out that Surface RT is also unlikely to achieve great performance in the upcoming quarter, which may force Microsoft to bring out its Intel-based Surface Pro tablet earlier in December
Unfortunately for Nvidia, Qualcomm (QCOM), and ARM Holdings, Windows-on-ARM is likely due to be a secular dud. While there has been rather outsized fanfare surrounding the availability of Windows on the ARM ecosystem, Intel crashed the party by releasing its Atom Z2760 tablet-oriented system-on-chip. It provides all of the power saving goodness of a typical ARM SoC such as Nvidia's Tegra or Qualcomm's Snapdragon S4, but brings along with it equal-or-better performance, better battery life, and compatibility with the full version of Windows 8 and the millions of legacy Windows programs.
In short, there is not a sufficiently compelling reason to run Windows on ARM as long as Intel has a competitive product. The Street now has confirmation of this with disappointing Surface RT sales, which is one non-trivial fundamental driver to Nvidia's abrupt share price decline.
Windows 8 Device Sales Apparently Aren't That Great
While Microsoft's management initially led the Street to believe that it had sold 40M units of its Windows 8, it seems that a report from NPD, actual sell-through has not been particularly encouraging. Windows device sales have fallen 21% from the year-ago period. This, of course, affects Nvidia, since a good part of its business involves piggybacking graphics processors onto notebooks and desktops sold through the OEM channels. It is important to note, however, that the majority of Nvidia's graphics card sales actually occur through direct sales of graphics cards to individuals rather than via pre-built OEM PCs, so PC sales do not necessarily correlate perfectly with Nvidia's graphics card sales. The raw sales numbers also do not break down the amount sold at given price points. It is likely that the low end PCs are being affected while the high end still thrives.
Nevertheless, weak Windows 8 sales further implies weak PC sales, which is what ultimately drives a stock like Nvidia in the short term, given its association with the PC space.
I maintain a very bullish stance on Nvidia, especially since the majority of its business is in high-end, boutique PCs which are not particularly subject to cannibalization by performance-limited devices such as tablets and smartphones. Further, Nvidia's tablet-chip business, certainly not helped by the essentially nonexistent Windows RT tablet sales, is bolstered by strength in the Android tablet space. Nvidia's "Tegra" powers many popular Android designs such as the "Nexus 7" and the "Transformer Prime."
In addition, Nvidia's strong net cash position of $3.43B, representing nearly 50% of market capitalization, along with a dividend-yield of 2.51%, makes the firm a particularly attractive long-term buy as higher margin PC graphics card sales remain healthy and as the firm's very high margin "Tesla" HPC accelerators continue to achieve rapid adoption.