NVIDIA: Valuation Should Pressure The Stock

| About: NVIDIA Corporation (NVDA)

If you're not already familiar with NVIDIA (NASDAQ:NVDA) products, NVIDIA produces processors designed to accommodate high quality graphics on desktops, notebooks, handheld devices, and video game consoles. Their chips are also incorporated into cellular telephones. NVIDIA offers some of the most powerful graphics chips on the market today and they are a leader in their industry.

nvidia logoAll major computer manufacturers offer NVIDIA chips as either a standard component or an option in conjunction with their top line desktops and notebooks. NVIDIA chipsets come standard on Apple's (NASDAQ:AAPL) high-end products, Dell (NASDAQ:DELL) offers NVIDIA chipsets to all of its customers when they personally design the individual's computer systems, and Hewlett-Packard (NYSE:HPQ) does the same.

GPU's ( graphics processing unit) have primarily been used to facilitate high resolution graphics, and therefore they have been most popular to either the high end user or those users interested in gaming, video development or other forms of computer-based entertainment. With the rollout of Microsoft's (NASDAQ:MSFT) Vista operating system however, all of that may change.

NVIDIA expects to see a boost from the rollout of Vista. Vista directly utilizes the power of a dedicated GPU like the ones supplied from NVIDIA. Therefore, as Vista becomes more and more popular NVIDIA believes that its chips will be incorporated into many more computers than it already is. NVIDIA expects to ramp up with the rollout of Vista. However, none of this has been incorporated into the earnings expectations for NVIDIA going forward, so this could be considered a future piggyback cycle for the company.

Current quarterly earnings are expected to be released on February 8. Consensus estimates are for $.37 per share. The long-term growth rate for NVIDIA based on Reuters Research and the consensus estimates which it develops its 17.18%. NVIDIA currently trades at 29.62 x 2007 earnings estimates. On that basis alone, NVIDIA looks expensive.

There is more to the valuation story than just that though. But before we delve into it, let's take a look at what happened to NVIDIA during the recent past. With the rollout of Apple's iPhone many Wall Street analysts were evaluating and estimating which companies would be supplying components to develop the iPhone. That information as of now has not been officially released. Wall Street expects to get that information soon. Some analysts had believed that NVIDIA chipsets would be involved in the production of the iPhone.

That was a first look estimate by these analysts. Since then, the analysts have concluded that NVIDIA chipsets are not likely to be part of the component group for the iPhone. NVIDIA is part of the Motorola (MOT) Motorazor which is new for 2007, but it does not likely appear to be part of the iPhone. When Apple releases earnings on Wednesday the component groups for the iPhone may be disclosed. While Wall Street doesn't expect NVIDIA to be part of that list, it could be. The potential for a positive surprise therefore exists without the risk of a substantial disappointment.

This is a great segue into our analysis for NVIDIA. Aside from the undulations at the early part of the week last week, NVIDIA traded along with the NASDAQ almost perfectly last week. This suggests that if the NASDAQ continues to move higher, NVDA will likely follow. Our current analysis of the NASDAQ suggests that it has a high probability of increasing quite aggressively this week. If that happens, we expect NVIDIA to follow along. If the NASDAQ increases this week, we expect NVIDIA to increase as well.


In addition, the undulations early last week had importance from a technical standpoint as well. The stock came close to a test of longer-term resistance in December. From there the stock declined. But last week the stock tested longer-term intra-channel support. From our rules of technical analysis we should expect stocks to decline from tests of longer term resistance to levels of longer-term support again over time. However, in order to do that they must first break below levels of intra-channel support; small bounces occur when intra channel support levels are tested, but they rarely last long. Therefore, from a longer-term perspective we believe that NVIDIA will trend lower over time until such time as longer-term support is tested.

NvidiaHowever, as noted above, the stock must break below intra-channel support first in order to fulfill the oscillation cycle from resistance to support. Because the stock has begun to bounce higher from intra-channel support already though, we are expecting NVDA to continue that short-lived bounce during this next week as well. Only afterwards, will we expect the stock to resume is decline to longer-term support.

NVIDIA has recently tested longer-term intra-channel support. Since then, the stock has increased a little as we would expect. Coupled with the fact that the NASDAQ is most likely going to increase this week as well and NVDA has been trading with the NASDAQ, the chart patterns for NVIDIA tell us that buying the stock with a short-term duration is probably a wise bet. To boot we have the possible surprise without risk of disappointment in Apple's quarterly earnings release on Wednesday.

In summary, NVIDIA is a market leader in GPUs and the company is poised to benefit from major product cycles going forward. But from a valuation perspective and from a technical analysis, the stock looks more likely to decline over time than it does to increase. This will be the scenario until such time as NVDA's valuation comes into parity with longer-term earnings expectations, and that should happen when the stock tests longer-term support.