In my recent note on Nvidia (NVDA), I pointed out that there was tremendous embedded value in the company by virtue of its graphics/HPC businesses, the potential growth in its Tegra business, and its large (and growing) cash position that makes up roughly 50% of its market capitalization. However, I also noted that shares lacked a real, fundamental catalyst to push the stock upwards. In my view, there are two kinds of investors, both of whom likely have wildly differing perspectives on this situation:
- Long-Term Investors: The longer-term investors in this name are patiently waiting for a number of things to play out, namely the growth from GRID, the growth of the Tegra business into its cost structure, the growth in HPC, the recovery of the professional graphics business, and continued strength in gaming graphics. There's a lot of potential here and many investors (including yours truly) typically think that these will drive long-term sustainable revenue growth.
- Traders: Nvidia used to be a trader's dream. It was highly shorted, and thus highly volatile, and was at the center of a lot of hype around Windows RT and the Tegra opportunity in general. This used to be an excellent trading vehicle, and I sense that many are frustrated with the name simply because it no longer offers the "rush" that it once did (although options traders have done very well selling the $12 puts on pessimism and selling the $13 calls on optimism).
For the trader types, I'm sorry to say, but this is probably going to continue to be a "boring," fundamentals driven name. It is no longer highly shorted, and there's only so much news about mobile chips that you can put out, especially when the market is leery of your chances in this space. In order for this stock to move, there needs to be a measurable improvement in the fundamental picture from a "proof" standpoint rather than PRs about a new chip or something. What does this mean?
Well, quite simply, the market doesn't like the uncertainty surrounding the company's business right now. After missing analyst expectations on the Q1 guide, Nvidia refused to give full year guidance. At the analyst presentation at GTC 2013, while the company gave some nice roadmaps, there was still plenty of uncertainty on the financial picture for 2013. Will EPS grow? Will revenue grow? Does Tegra 4 have any major design wins? These are the questions that the analysts and investors quite rightfully are waiting to hear answers to before really hunkering down and investing their hard earned capital in the stock.
Enter Analyst Day
On 4/11, Nvidia will be hosting its analyst meeting. This will give the company a chance to really explain itself and its strategy to investors. While product roadmaps are nice, what would really help are the following:
- Preliminary information on how well Tegra 4i (modem + apps processor) design wins are tracking
- Some more color on Tegra 4 tablet design win momentum
- Full year revenue guidance range
- Full year gross margin/opex guide
- Insight into how well the Professional GPU market is recovering and how market share trends look
- Information on how discrete GPU sales trends are going, how threatened Nvidia feels by Intel's (INTC) upcoming "Haswell", and how AMD's (AMD) recent aggressiveness in graphics is impacting the business if at all
My belief is that the market is pricing in a ton of uncertainty, so any concrete information (either turning out to be very positive or simply "not as bad as expected") could help to give the shares a little more "oomph" in this raging bull market. Now, there's one more thing...
Intel's Upcoming Earnings Report
While Nvidia's fate is tied mostly to high-end gaming PCs (which are fairly insulated from potential tablet cannibalization), there is no doubt that as long as the broader PC market remains under significant pressure, Nvidia will also face said pressure. Intel is actually set to report earnings on 4/16, and any positive comments from them on the broader PC landscape could help lift all of the boats in the sector. My impression is that there is a lot of pessimism for PCs, so any "not as bad as expected" commentary could even be helpful.
So there you have it: two potential catalysts for Nvidia's shares to break out of this $12 - $13 trading range. While this could be exciting for traders, these catalysts are actually more important for longer-term investors, as we have been pretty much in the dark for the last 6 months or so. The business is healthy and seems to be growing, but shares very rightfully reflect a funk that has been very tough, even for believers in the story, to deal with.