Nvidia: Strengths Outweigh Premium Valuation

| About: NVIDIA Corporation (NVDA)

Nvidia (NASDAQ:NVDA) reported $821m and $0.39 vs Street estimates of $749mn, $0.34. Revenue strength was driven by a better than seasonal increase in desktops 15% QoQ, substantial growth in notebooks up 46% QoQ and robust chipset sales up 35% QoQ. Bullets from earnings:

* The company guided 4Q revenue to the upside 5% sequentially, which equates to roughly $862m vs The Street's forecast of $798m. Management expects sequential growth in desktop, notebook, and workstation. In addition, the company expects gross margins to increase roughly 100bp QoQ to roughly 43%.

* NVDA's strengths can be seen in multiple areas, such as its robust revenue growth, solid financial position with reasonable debt levels by most measures, return on equity, impressive record of earnings per share growth and compelling growth in net income.

* I feel these strengths outweigh the fact that the company is trading at a premium valuation vs. its peers. That being said, investors should note that the January quarter is seasonally the strongest quarter of the year for NVDA.

* On November 8, NVDA had a launch event for its widely anticipated next-generation desktop product, the GeForce 8800 series. According to management, the 8800 series delivers two times the performance of its prior generation, addresses the HDTV market with its PureVideo HD Technology, and enhances performance through the use of DirectX10 and advanced shading technologies.

* The strong rally in shares means The Street believes the new product introductions will likely boost NVDA’s already solid technology advantage, especially considering ATI isn’t likely to launch its next-generation product until sometime in 07.

* NVDA announced its first Intel-based platform to enable the market for the GeForce 8800 series. I believe the introduction of NVDA’s first Intel-based reference motherboard design is indicative of a closer relationship with Intel in the future, which should begin generating meaningful revenue in 07.

* I'm a little disappointed that management provided limited working capital insight pending resolution of its ongoing review of stock option practices. Cash increased from $850m to $1.17bn about $3.20 in cash. Inventory modestly decreased $5m QoQ to roughly $360 (or 70 days down from 87 days).

* After experiencing outstanding growth for much of 2000, the industry was subsequently marked by a sharp downturn amidst weak market conditions for technology and the economy as a whole.

* Improvements in the overall health of this backdrop bode well for the industry in late 2003. These ups and downs are nothing new for the Semiconductors & Equipment industry, which is highly cyclical in nature.

See: NVIDIA F3Q07 (Qtr End 10/29/06) Earnings Call Transcript

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Tagged: , Semiconductor - Specialized
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