Nvidia: Why An Intel-Based Sell-Off Makes No Sense

| About: NVIDIA Corporation (NVDA)

There will likely be a short-term sell-off in shares of Nvidia (NASDAQ:NVDA) as the affirmation of the shrinkage of the PC space as a whole. People are also very likely to then note that the majority of Nvidia's business comes from selling graphics cards into PCs and will then, in turn, become much more bearish about what Nvidia will guide for the next fiscal year. This line of reasoning is erroneous, and I believe that on any significant weakness due to the Intel (NASDAQ:INTC) results should be bought into.

Case In Point: Only Low-End PCs Are Being Cannibalized

The first question to ask is, "well, which PCs got cannibalized"? It stands to reason that if tablets are having an impact on the overall market, it is much more likely to be affecting the low end of PC market rather than the high end. If that case holds water, then Nvidia's PC-related business should not be particularly sensitive to such cannibalization. The following Q&A from the Intel call sheds some light on the matter:

Sumit Dhanda

Okay, and then for my follow-up, it's on ASPs. They are up, both on the data center and the PC client group. Any particular dynamic at work? I know in the third quarter, data center ASPs are weak because of the mix. If you could shed any light on both of those categories? Thank you.

Paul Otellini

Sure, in the data center, as I said in my comments, the driver was Romley was shipping to the Sandy Bridge for server part. That drove the mix up and it drove the mix to [MP] up and that helped drive the overall richness of the data center business.

On PCs, what we saw was the strength in the core product line principally going into Ultrabooks and laptops and little more weakness than we would have first thought in the bottom of the PC market in our Celeron and Pentium product lines.

The weakness seems to have been at the low end, but there was strength in the "Core" product line which mainly go into Ultrabooks and laptops. However, the "Core" product line also goes into higher end desktop PCs. This implies that the higher end notebooks and desktops, which both regularly feature discrete GPUs from Nvidia, were still strong.

This makes sense as a gamer who wants to play Battlefield 3 at 1920x1080 at maximum settings is unlikely to be satiated by the gaming experience of a tablet. In general, anybody who needs performance (graphical or processor) is not going to be buying a tablet in place of a laptop or desktop, suggesting that Nvidia's discrete GPU business is quite safe from the effects of tablets.

Nvidia Plays A Part In The Cannibalization

Turning this around even more, if Intel is seeing its low end PC sales erode slightly due to the presence of tablets, then it stands to reason that Nvidia is actually benefitting from this trend. Not only is its high-end position quite safe, but Nvidia's strong presence in tablets is only going to benefit from any shift from the low-end/cheap PCs to tablets.

According to a recent report from Strategy Analytics, Nvidia took 1/3rd of the non-Apple (NASDAQ:AAPL) tablet chip market, which was enough claim leadership of this market. Further, as Texas Instruments (NYSE:TXN) is one of the top five players in the space, its intention to back out of this arena will free up designs (such as in Amazon's (NASDAQ:AMZN) next Kindle Fire tablet) that remaining players can compete for.


In short, if the Street makes the unwise decision to lump Nvidia in with Intel, then those who believe in Nvidia's long-term story should feel comfortable adding to their positions. With $5.50/share in net cash per share, and on-track to post nice revenue growth for FY2013 as well as FY2014, it seems difficult to model too much downside from current levels. Additionally, an upside target of $18 by the end of calendar 2013 seems quite reasonable based on analyst projections of $0.96 EPS and a P/E multiple of 13 ex-cash.

Disclosure: I am long NVDA, INTC. 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.

Additional disclosure: I am short AMZN