Nvidia Shares Swoon on Margin Concerns

Nvidia (NVDA) shares are down sharply this morning on worries about declining margins - as well as weakening PC demand and heightened competition from Advance Micro Devices (AMD) and Intel (INTC).

The company last night reported in-line fourth quarter results, and said first quarter revenues would be down slightly on a sequential basis, but better than seasonal (see conference call transcript). The stock actually traded higher in yesterday’s after hours session. But as the Street has crunched the numbers, the focus has shifted instead to lower-than-expected gross margin in the fourth quarter - at 45.7%, gross margins were down about 50 basis points sequentially, due to higher production costs for the GeForce 8800 line of graphics chips. Also in the spotlight: a forecast for an 8%-10% rise in operating expenses in the first quarter, due to acquisitions and payroll-related items. Combine that with the general concern about IT spending that Ingram Micro (IM) noted last night, and you have a recipe for a sell off, which is just what we’ve got.

Here’s a rundown on some of the Street’s comment on the stock from this morning:

• Mark Lipacis, Morgan Stanley: “This is the first quarter in a year where the company didn’t materially beat and raise expectations,” he writes. Lipacis maintains his Underweight rating, and cuts his price target to $23 from $32. His EPS estimates drop to $1.41 form $1.50 for the January 2009 fiscal year, and to $1.37 from $1.61 for FY 2010.
• Sidney Ho, Merrill Lynch: “The stock looks fairly valued to us, especially considering the weakening economy and the high likelihood that AMD will regain share this year.” He remains Neutral on the stock.
• W. Blake Fischer, Stifel Nicolaus: “Given our stance on the developing risks for Nvidia, and the resulting potential of an inflection in growth rates and market share, as well as weaker margin leverage trends, we are maintaining our Sell rating.”
• Doug Freedman, American Technology Research: “We are increasing our estimates, but note that expense growth is accelerating. We worry about total market growth and the emergence of better execution from AMD/ATI and Intel.” His rating remains Neutral.
• Michael McConnell, Pacific Crest: He notes that this was the first sequential decline in margins in 13 quarters. He cut his target price to $31, from $34, but maintains an Outperform rating.
• Nicholas Aberle, Caris & Co.: Aberle writes that he sees a difficult first half, “in light of a tightening competitive landscape and general macro-related consumer softness.” He maintains a $28 target and Average rating.
• Bobby Burleson, Canaccord Adams: He maintains a Sell rating, and contends “negative data points around the health of PC demand post Chinese New Year are likely to weight on Nvidia.”
• Arnab Chanda, Deutsche Bank: “Caution is warranted given that calendar ‘08 for NVDA may be challenging driven by a slower-than-expected PC environment, share loss in laptops, share peaking in desktops and Intel share gains offset by AMD share loss in chipsets.” His rating remains Hold.

Nvidia today is down $3.49, or 12.9%, at $23.53.

Comments

[jcrash]

It's always something.

I'd have to say that given the 40% selloff that has already taken place, all these downgrades are a little late to the party and make me hold my nose.

13 quarters of rising margins - uh oh, a small decrease - lets cut it in half. Who is the dude forecasting earnings of $1.41? Is he on drugs? They will get that in 3 quarters, easily. Notice how after the last quarter earnings estimates went UP by some 20% for this quarter, those numbers were exceeded and now they will in fact need to raise estimates for next quarter which sit at $.41/share. NVDA already said "less than seasonal" decrease for this quarter, and the estimates are for worse. So, once again the analysts will raise estimates and lower price targets.

Something stinks pretty badly here. The call action is very telling. Someone is selling thousands of calls at the money. Then they hold it down. Their averaging buy price is lower than the lows thanks to this. So far, less have been sold for next month than last month at this time, so we shall see.

$1.75 easily this year given they only need to average $.41 per quarter for the rest of the year to make that number. The analyst saying $1.41 is thus saying they only will make $.31 per quarter. Yeah, right...increasing revenues at 20% or more will do that every time.

Yes, they said on the call to expect higher operating expenses - I know, but they also said the margin related issue was a one time issue.

This stock is simply reflecting its beta - which is 3.0. Expect the traders to play it all over the place, but in a year or two, you are looking at a double from these depressed levels. Simply slapping a P/E of 15 on it with next years earnings easily at $2.25 gives you an easy 30% return.

I'm long, and I'll get longer should it sell off into the teens.