Seeing Upside Potential in Nvidia

Nvidia (NVDA) has been seeing selling pressure since its 52-week high at 38.96 back in December on skittishness of pricing pressure, lower margins, high inventory levels, competition in desktop GPUs faced by AMD, and light PlayStation 3 sales.

In November and December of last year I went to a couple analyst meetings with Nvidia, and beyond CEO Huang's impressive sales pitch, there was a clear avoidance of addressing several key issues, including excess motherboard inventory and graphic cards in retail, and possible failure of Vista related PC sales to boost demand. Most analysts left very bullish on NVDA, however as NVDA continued to ramp production attempting to stimulate demand, January rolled around and demand appeared weaker, and as Eric Ross of Think equity pointed out that Nvidia had slowed wafer starts at its suppliers. NVDA sold off to around $30, digesting near term weakness.

4Q07 came above estimates at $0.44 due to lower taxes, and revenue of $878.9 on higher than expected chipset and memory shipments. However cautious guidance failed to bring much upside, guiding for its revenues to decline 5% QoQ in F1Q08 below estimates due to weak orders for chipsets, expected decline in memory, and lower than expected revenues from Portal Player. Gross margins came in line with estimates at 43.9% , and guided flat at 44.0%.

While near-term cautiousness appears to have already been discounted into the stock, NVDA has a lot of upside potential. Firms are increasingly optamistic about gross margins through F08, seeing positive benefits from Intel's roadmap of integrating graphics functionality on the CPU, presence in the AppleTV with a "potential $20 worth of content" acording to analyst Nicholas Aberle at Caris & Co, overly conservative expectations and beaten down stock price, and GS noting Intel's Santa Rosa launch and a pick up in Vista related PC/notebook sales.

Watch for upgrades in the coming weeks.

Disclosure: Author is long Nvidia from the $28 area.