Nvidia's Tug-of-War

Since we published our report on Nvidia (NVDA) back on January 29th, the shares have vaulted to $12 then sunk back to near $8 and are now sitting in the middle at $10.50. Our intrinsic value (IV) estimate remains $15, which is a level we think the stock will see this year. But the story is filled with drama, so the levels on the stock are likely to continue to be all over the place.

These two *adjacent* Twitter messages illustrate the situation in a nutshell:

Two adjacent tweets tell the story

Intel (INTC) has clearly awakened to the threat from the GPU in general and Nvidia in particular. Larrabee is a very powerful and potentially useful chip but to us it appears to be aimed at the high end of the market which is not where the growth is now. Over time we expect servers to handle more graphics processing, but now the trend is towards laptops, netbooks and even smart phones.

Nvidia clearly has been building a lead here. First with the Apple (AAPL) deal and now with a stream of design wins and announcements around their new Tegra and Tesla platforms. Next week at Computex Taipei many more will be added to the fray.

The overall context here is that visual computing is going mainstream and obviously a GPU is an important part of making that happen. Arguing the Nvidia versus Intel case is a waste of time if it weren’t for a history of somewhat anti-competitive behavior from Intel.

In short we are fairly certain that Nvidia will come out a winner from this trend. After all they are the only company 100% focused on this market and it’s finally coming into is own. Yes, we know, margins are a concern. However, we’ve made fairly conservative assumptions in coming up with our IV of $15.The company also has generated very high returns on invested capital and sits with a large cash reserve.

In addition to the news out of Computex next week the company will be hosting their annual analyst meeting on June 16th. It’s no wonder that volume on the June options has skyrocketed in recent days. We expect fairly large sums to be won and lost in the next few weeks as investors apply intense pressure to “figure it out.”

Disclosure: Research 2.0 maintains a variety of positions in NVDA stock and options, both long and short. At the time of this writing they would be described as "net long in aggregate."

Comments

[storm999:]

I love this company, so I'm baised. Nvidia chips are putting supercomputing power on the desktop. The next wave of computing is visualization and they are in the early lead.

Jun 12 12:20 PM