Last week was marked by a raft of analyst downgrades and estimate cuts for semiconductor companies. Many analysts now believe that PCs are in permanent decline due to competition from tablets (and even smartphones). While PC manufacturers like HP (HPQ) and Dell (DELL) have been punished the most so far, some analysts are also turning bearish on component makers elsewhere in the supply chain. Intel, AMD (AMD), and Nvidia (NVDA) were each called out by various analysts over the course of the week.
Intel, as the dominant CPU supplier in the PC supply chain, has become a natural lightning rod, as analysts debate whether or not the company can gain significant share in mobile processors to offset PC weakness. A number of analysts downgraded Intel (INTC) and/or cut their Q3 estimates based on expectations of PC weakness. This culminated with an official guidance cut by Intel on Friday. Whereas Intel initially forecasted revenue of $13.8 billion-$14.8 billion for Q3, the company now expects revenue of only $13.2 billion (plus or minus $300 million). Intel also cut its gross margin guidance by one point. Intel blamed the expected revenue miss on "customers reducing inventory in the supply chain versus the normal growth in third-quarter inventory; softness in the enterprise PC market segment; and slowing emerging market demand."
Perhaps unsurprisingly, AMD and Nvidia were caught in the market's crossfire on Friday, with AMD declining even further than Intel. AMD is probably in for a rough ride. The company is competing from a position of weakness right now in both the CPU and GPU businesses, vis-a-vis Intel and Nvidia respectively. Over time, AMD's dual focus on CPUs and GPUs may allow it to gain share with its APUs that combine both components on the same die. For the time being, though, AMD faces the same headwinds as Intel in the CPU business, and is also likely to lose market share in discrete GPUs to Nvidia's new Kepler architecture. While AMD actually gained share in Q2, Nvidia has recently begun to release Kepler chips targeted towards mainstream users and will continue to do so through year-end. Nvidia's management is confident that the company will quickly win share from AMD upon release of the new Kepler chips.
While Intel's announcement may have been bad for Intel and AMD, I don't think it bodes ill for Nvidia. As I just noted, Nvidia looks to gain share within discrete GPUs with the release of mainstream Kepler GPUs. Nvidia already a scored a big win earlier this year when it won the MacBook Pro design slot back from AMD. Share gains are likely to fully offset declines in the overall market for discrete GPUs during the second half of the year. Thus far, supply constraints have been the limiting factor for Nvidia's GPU sales. As the supply picture improves, Nvidia will be able to move more products to the Kepler architecture, driving further demand.
Furthermore, none of the three stated causes of Intel's guidance cut has a straightforward impact on Nvidia. First, inventory reductions in the supply chain could cause some near-term weakness, but the threat seems quite minimal given the supply constraints on Kepler. Moving forward, OEMs will eventually need to refill the channel, as end-user demand improves. Second, enterprise PCs make up a substantial part of Intel's business, but the GPU attach rate is very low. Nvidia's discrete GPU business is consumer-oriented. There might be some near-term softness in Nvidia's professional graphics division, but that would just be a continuation of the recent trend. Third, while emerging economies do represent a large market for Nvidia, consumers in China may choose to upgrade their graphics cards as a substitute for buying a new computer. Nvidia does face some risk here, but significantly less than Intel.
One last factor to remember when assessing the implications of Intel's guidance cut is that while Intel and AMD both reported results back in July, Nvidia reported in August. Thus, its Q3 forecast is much fresher than Intel's and likely included some of the recent weakness that Intel did not foresee.
In short, Intel's guidance cut on Friday is not a sure sign of bad news to come for Nvidia. With Nvidia having offered bullish guidance only a month ago, and with a strong pipeline of new products debuting over the next few months, I think Nvidia shares offer compelling value at the current price. Excluding cash, Nvidia trades at less than 10X FY13 earnings and 8X FY14 earnings. I would recommend buying on weakness over the course of this month, particularly if shares approach $12.