Nvidia Admits to Underestimating AMD

Nvidia (NVDA) had one ugly second quarter. It lost money. It took a charge for defective chips. And it’s stuck with low-margin inventory it has to burn off. Amazing how a little price competition from AMD’s ATI can magnify poor execution at Nvidia.

Nvidia CEO Jen-Hsun Huang said on the company’s conference call:

We underestimated the price performance of our competitor’s most recent GPU, which led us to mis-position our fall lineup. The first step of our response was to reset our price to reflect competitive realities. Our action put us again in a strong competitive position but we took hard hits with respect to our overall GPU ASPs and ultimately to our gross margins. The price action was particularly difficult since we are just ramping 55-nanometer and the weak market resulted in taking longer than expected to work through our 65-nanometer inventory.

That competitor would be AMD’s ATI and Nvidia has been forced to cut prices to keep share. The larger question is why Nvidia underestimated (AMD). Sure, AMD is struggling, but when a rival is backed into a corner it cuts prices. And when a weak economy aligns with AMD’s price-per-performance mantra Nvidia should have known it would have some trouble. Simply put, Nvidia got cocky and AMD popped the company in the mouth.

Huang put on a brave face, acknowledged that “we got tripped up in Q2,” but argued that “we’ve dusted ourselves off and we are now intensely focused on changes and improvements that will enhance our performance in the future.” Nvidia is putting some money to back up its rebound thesis with a share buyback, but the company is no sure bet–at least until it burns off its low margin inventory.

By the numbers, Nvidia reported second quarter revenue of $892.7 million, down 5 percent from a year ago. The company reported a loss of $120.9 million, or 22 cents a share. That figure includes a $196 million charge to cover warranty and repair costs from defective notebook graphics chips. Excluding that charge and other items, Nvidia reported earnings of 13 cents a share. To cushion the blow, Nvidia said it may back another $1 billion in shares. Nvidia said its third quarter revenue will be up slightly, which is below what analysts were expecting.

The message from Nvidia was that it will be putting its house in order and execute better. However, analysts weren’t buying it. Why? Nvidia is in the penalty box, has to burn off excess channel inventory, AMD isn’t going anywhere and Intel’s Larrabee platform is a threat a few years from now.

Analysts remain skeptical with Piper Jaffray analyst Gary Mobley delivering the consensus assessment:

Competitive concerns have recently taken center stage, as new products from AMD/ATI are turning up better than expected, and Intel continues to make noise about its upcoming Larrabee graphics chip…The competitive pricing issue stems from a better than expected price-performance product released by arch rival ATI (a division of AMD). While some may argue that a lot of negative news is currently priced into the stock, we feel significant challenges remain an overhang for the near-to-intermediate term.

It’s hard to argue with that take until Nvidia proves otherwise.

Comments

[User 243082:]

<<The larger question is why Nvidia underestimated (AMD).>>

Look to the last three high end product releases from ATI to understand the answer to that question. In every case ATI made a lot of noise pre-launch about how they were going to hand it to Nvidia. Last 3 generations were nothings. This time around, the noise was the same. How many times do you listen to the boy crying wolf. The difference was they really DID execute, instead of just SAYING they were going to.

The problem with you and Piper Jaffray's conclusion is fundamentally, who is the stronger player, Nvidia or AMD? AMD is fighting a brutal war on two fronts, and despite the posture of this article, it's not winning either. AMD have lost billions in the last few years, fired the CEO, laid off 10% of their workforce, scuttled fabs and taken on billions in debt, unusual for high tech. The green guys dropped prices to maintain share, so where does that leave ATI? Another money losing quarter perhaps? That's what all the projects say anyway.

As far as Larrabee goes, it's just like every other non-cpu project that Intel puts out: filled with FUD and nearly every time they talk about it, it slips another quarter or two, like whoops, no big deal. Few are paying any attention to the really meaningful issues Intel faces with this project, software -- both driver compatibility and developer support. These are enormous challenges and no body is pay attention, all they can say is, "but they're INTEL." Intel are bastards to the industry, yet press and analysts eat their garbage up with a spoon.

Nvidia are investing in CUDA to extend the reach of the GPU, and have a very compelling product coming up in the Tesla product line. But the biggest asset they have is their CEO who doesn't like to lose, one can rest assured there was some major ass-kicking going on over the last quarter.

So who would I bet my money on? It certainly wouldn't be the dual-front underdog, AMD. It would take every effort they have to win just one of those fronts. Intel? The guy who's proven zero success in everything it's ever attempted outside CPUs, the guy who needs to spend man-centuries developing and perfecting a new software architecture? The guy who is being threatened by a measly little graphics chip, that oh, just happens to be orders of magnitude faster than the architecture they've been perfecting for 20 years. . .?

The answer is simple: NVDA is a steal at these prices.

2008 Aug 13 07:16 PM

[JFrazer1:]

In the gamer-enthusiast and high-end PC hobbiest communities, ATI & AMD have long been associated with better bang for the buck (value) while Nvidia and Intel have been associated with top-end performance. ATI & NVIDIA are Saturn to Nvidia & Intel's Ferrari. Also, GPU manufacturers have been leapfrogging each other's tech since the beginning of GPU manufacturing. This market also has intense brand loyalty. I'm not handing the game over to AMD based off of one single product in one single quarter. NVDA is also incorporating physics processing into their GPU lineup, and buiding top-end mobile GPUs. NVDA, INTC, and AMD are all expanding their potential markets, and have slightly different target demographics. Now if only NVDA hadn't pulled a Microsoft and lost tons of money on their hardware because of warranty costs resulting from using a shoddy manufacturer in an effort to save a buck That came back to bite them in the ass.

2008 Aug 13 10:46 PM

[JFrazer1:]

A correction to my last comment: I meant "ATI and AMD are Saturn to Nvida and Intel's Ferrari". Not 'ATI & NVIDIA are Saturn to Nvidia & Intel's Ferrari' which makes no sense. :)

2008 Aug 13 10:48 PM

[BrianZach:]

These fears about NVDA are way overblown. NVDA messed up the past couple of quarters, but it doesn't mean that the company is near failing. The company made a mistake, admitted it and is looking to move on, which is better than most companies can do.

The problem with many of these articles is that they don't reflect the price into the analysis. If NVDA was trading at 30 I would be more worried than when NVDA is trading at 13. If the risks are already priced into the stock, it is usually a good time to buy it because your downside is limited.

2008 Aug 14 06:37 PM

[principle:]

But what ratio of earnings to stock price is it? I wouldnt say the risk or negative is already priced into the stock now. I would say that there was too much speculation and optimism priced into it before. It just got a reality check. Fans of Nvidia would say they have always been the high performance choice, but you would have a short memory. ATI has always been competing to be and at times were the perfomance leaders.

2008 Aug 15 03:42 PM

[R0x0R:]

Physics on the GPU was done by ATI first a few years ago. Nvidia played catch up. ATI has enjoyed the better technological solution for many years while Nvidia has traditional simply taken a brute force approach.

The cold hard truth is that physics isn't a realistic play for software developers. It requires consumers to already have advanced hardware or their games and applications perform horribly from the lack of physics on the GPU. This simply means that software companies must now sell hardware as well or their software product won't sell compared to other titles that don't require physics on the GPU.

Both Larrabee and Radeon graphics cards will feature the same physics solution (Havoc) while Nvidia is alone in using PhysX. While PhysX may have the more appealing name, Havoc is a better solution. Nvidia just got outnumbered.

The government has restrictions against sole source products so Intel can't afford for AMD to go away. Even if they play second fiddle to Intel on the CPU side they will remain a player until there is no such thing as an x86 processor. Intel and AMD also make their own chipsets.

So where we used to see two arch rivals, we now see partners in crime both of which can make the only two products Nvidia has- GPUs and chipsets. Ultimately this makes Nvidia the odd man out and the most likely candidate for deletion within the next five years. It's only a matter of time.

2008 Aug 16 03:36 AM

[Gaffey:]

> Physics on the GPU was done by ATI first a few years ago.

Only as a demo, they failed to ship it in usable form by game developers.

> ATI has enjoyed the better technological solution for many years

Can you say "R600"?

> The cold hard truth is that physics isn't a realistic play for software developers

This paragraph is right on, I agree. Undercutting the next one...

> The government has restrictions against sole source products so Intel can't afford for AMD to go away

No, but they can certainly afford for their ATI division to go away. Dirk Meyer may end up having to make that hard choice, given his dire finances.

> [Intel and AMD] partners in crime...

This is a stretch.

"User 243082" has it right about Larrabee. Intel's present software capability stinks, to say nothing of their poor relations with game developers. A GPU product's value is delivered through a broad and deep suite of software drivers, unlike CPUs or other PC components. ATI and Nvidia have mature driver suites, at great continuing development cost. Intel has to boot itself up from nowhere in this department. Good luck.

2008 Aug 18 12:10 PM

[principle:]

I thought it was so awesome that Nvidia itself released an article saying thay people put an APB on their PhysX and hyped it up themselves. Thats just dumb. NVDA is a good company, but its not going to be back above $20 stock price in the next several years, maybe the $17 area of reasonable price to earnings ratio of 18-20 for a semiconductor company with no foundries. But one more "glitch" and investors will dump it again which is so easy to happen when doing a die shrink to smaller manufactuing process and designing with immature fabrication libraries will lead to at the bleeding edge technology. That is why AMD/ATI has the advantage right now, because they own and operate and are integrated with the bleeding edge designers and processes for manufacturing. Intel won the cpu battle only by pushing the envelope of manufacturing processes, otherwise they wouldn't be able to fit enough L2 cache on their multi-core cpu die to make them compute quickly, or be low enough power consumption. I see AMD having an advantage in this for graphics. AMD owns more in foundries and equipment than what their stock is worth. NVDA has cash on hand, but doesnt even have enough to do the buyback they say they are going to do, and haven't completed the last buyback they announced.

AMD won't split the company, makes no sense, seeing as its partially the only reason they are competitive in PCs, and a major part of the future CPU features, the most compelling being their CPU/GPU for laptops called Fusion coming out next year. AMD only needs $1.5B to cover operating costs this quarter, and they didnt really lose all that money last quarter, just claimed ATI wasnt worth as much. AMD will post a profit this quarter, along with a good cash infusion from selling off non-core pieces of ATI and the stock price will go up, post profit for the 4th quarter and stock will go up, then they will get a large cash infusion from some foreign entity, like a big check from Arab Oil for Christmas, giving them another 7% stake in the company, to give them the down payment on their New York foundry.

2008 Aug 20 12:26 AM