NVIDIA: The More Volatility, the Better

NVIDIA's (NVDA) stock has been quite a roller coaster this year since we published our original research report on January 29th. (See our February 10 Seeking Alpha article here). At the time we noted that the growth in

1. mobile computing,
2. visualization and
3. higher end processing all fed directly into the growth prospects for NVIDIA.

Since then we have seen the company continually expand their market share in these segments though design wins, product launches and new offerings. As we noted, Intel (INTC) has yet to show up at the party and when they do, they will have the wrong product. AMD/ATI has done well and some niche firms like Imagination Technologies [LSE: IMG] are in a very good position. However NVIDIA remains the company best positioned in these three markets.

Recently the company got closer to Microsoft (MSFT) in several areas including the Zune and linking resources to allow NVIDIA processors to accelerate Microsoft products in the same way NVIDIA is doing that for other software providers like Apple (AAPL) and Adobe (ADBE).

During their recent GPU conference they unveiled their next generation GPU which is quite impressive. However there is too much attention paid to the the high-end today and not enough to the mobile and embedded spaces which is where the real growth opportunity exists. In a few years people will ask “What’s a video card?” Don’t be surprised.

Over the course of the year the stock moved up to our initial intrinsic value (IV) estimate of $15 and we published an update in early September which also “rolled forward” our IV to $17 as it is now close to the end of the year.

Recently the stock has been downgraded by JP Morgan who cited risks to long-term estimates from increased competition and potential legal battles with Intel. On the estimate side current consensus for revenues calls for an increase of 14% YoY to $3.58B. That’s higher than the 9.2% for Intel but more inline with the likes of Qualcomm (QCOM) (13%), Broadcom (BRCM) (16%), Marvell (MRVL) (16%) and OmniVision (OVTI) (15%). What we conclude from these figures is that NVIDIA and also these other companies probably need a reasonable economy next year to exceed their current estimates. Inventory is still quite low and we get some very easy comps the next two quarters so the risk to estimates will be greater on the back end of the year.

Earnings are a bit harder to figure for next year because there is huge leverage on the gross and operating margin lines. Small improvements have a fairly large impact on earnings. Current consensus calls for $0.64 on the out-year which is up 3x over a depressed figure for this year. In our IV model it doesn’t much matter if NVDA reports 35c or 65c next year but obviously it will impact the stock, at least in the short term.

In our view, the more volatility for NVDA the better since by adjusting portfolio weightings one can capture much greater returns than the simple stock move. The shares are up 71% YTD but the 30% dip in May gave us a chance to go very overweight, further enhancing returns. With the shares down just over 16% from their recent peak we may not be at a major overweight yet, but we are scaling up a bit into weakness.

As we’ve said before, the only thing we really don’t like about NVDA is the heavy selling by the CEO and the fact they he has stated that he doesn’t see a big opportunity for NVIDIA in the enterprise. We know he’s wrong on the latter point. His selling has been regular and plan-based but it’s the type of thing that bothers just a bit.

Our historical published research on NVIDIA is freely available on our website after registration is approved.

Disclosure: Research 2.0 has a net long position in both NVIDIA and Imagination Technologies at the time of this writing.

Comments

[amdman]

Graphics is moving onto the CPU chip, in two years 80% of NVideas business goes away. AMD has ATI, Intel has its own graphics chips on the low end and Larrabee on the high end. Nvidea only hope is that Intel wants them, and is willing to buy them for 10 billion, when Intel was not interested last year when NVidea was at 5 billion. (I pointed this out, and obviously I missed a double when this dead cat bounced, but I was in AMD and got a triple.)
Some might bet on Vista/Windows7 minimum graphics requirements rising all boats, but its been two years, so you get twice better graphics for the same price anyway.
CPUs are faster than most people need, this is why Intel will always ship most of its CPUs with crappy graphics, so people have a reason to upgrade. This also moves most of the ASP/profit to Intels bottom line, as opposed to others.

2009 Oct 04 01:24 PM