Friday, August 11, 2006

Color on quarter: NVIDIA (NVDA)

Several firms are commenting on NVIDIA (NASDAQ:NVDA) following results and guidance released last night. The overall tone of the comments is cautiously poisitive:

*Goldman Sachs maintains Neutral rating on Nvidia as the stock is trading close to their 12-month price target of $22. Firm is ticking up their FY2007 (Jan) EPS to $1.06 from $0.99 on higher sales, but leaving FY2008 and FY2009 estimates unchanged at $1.06 and $1.13. Relative to their expectations going into the quarter, they view Nvidia's top-line growth opportunity as slightly better but its gross margin potential as slightly worse, which nets out to no change in out-year EPS estimates.

Nvidia's robust guidance lends credibility to recent speculation that Nvidia's chipsets may be designed into Dell's upcoming PCs based on AMD CPUs, as Nvidia commented on continued near-term gains with chipsets on the AMD platform. However, longer term, they expect gross margins to plateau rather than increase towards 45% as the company expects. This is because 1) the vast majority of GPU sales are already derived from the high margin GeForce 7 family, thus the contribution from a richer mix has largely played out, and 2) they expect Nvidia's chipset business mix to move from predominantly AMD-based to mostly Intel-based over the next 1-2 years, and believe the realizable margins for Intel-based chipsets are lower, given that Intel is a formidable competitor in that space, while AMD was historically not a competitor in the AMD-based chipset space.

*Deutsche Bank notes they have no holes to poke in NVDA's underlying biz, which was quite strong (all segments grew QoQ) in a relatively weak PC environment. Notably, NVDA stated that F2Q was back-end loaded (typical) with strong pick-up in demand in 2nd week of July that remains unabated (implying normal PC seasonality in 3Q). Inventories were slightly higher, but the firm is not concerned ahead of seasonally strong period.

*Bear Stearns notes NVIDIA's Jul-Q revenues of $687.5M (+0.8% QoQ) were above their estimate of $668M (-2.0% QoQ) and a tad above guidance of flat revenues. The company did not provide any other financials due to the ongoing options review. Firm estimates GM was better than expected and increased 50-100 bps, above guidance and their estimate of flat GM, and estimate that pre-option EPS was $0.30, above their estimate of $0.26 and consensus of $0.27. The company reported solid performance across its business units.

Firm notes they are maintaining their constructive stance on NVDA as they expect continued competitive strength in GPUs, improvement in PC builds in 3Q, near-term strength in chipsets due to Dell, and growth drivers outside the PC business (Sony PS3, wireless and workstation). However, they are maintaining Peer Perform rating given the strong recent move in the stock (up 37% as of Thursday's close from its low in mid-July).

Notablecalls: NVDA traded down 1.5 pts in after market action as market participants were not happy about the options investigation. Thats what you get when you buy a stock that has bounced 37%. Overall, solid results and guidance on the revenue side should help the stock today.

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