Friday, April 16, 2010

NVIDIA Corp. (NASDAQ:NVDA): Downgraded at Needham, Fermi not ramping

Needham is making a significant call on NVIDIA Corp. (NASDAQ:NVDA) downgrading the name to a Hold from Strong Buy and removing their previous $22 price target.

Firm notes the move comes after a series of channel checks indicating that Fermi is not ramping well and there could be further product delays. Based on their findings, NVIDIA has very limited supply of Fermi desktop/notebook parts and yields remain poor at around 20-30%. Moreover, Needham's checks indicate AMD Radeon 5800 is gaining design wins given its favorable price/performance, smaller die size and full product portfolio of DX11 40nm parts. Firm believes NVDA could lose market share starting in C2H10, face a more challenging pricing environment and/or experience potentially lower gross margins. Accordingly, the firm has reduced their FY11/FY12 revenues and EPS estimates. Given their concerns around the Fermi ramp, potential GM risk and lower forecasted ramp of Tegra, they believe the shares do not warrant a Strong Buy. They would recommend investors sell into any near term strength as they believe delays in Fermi could cause risks to consensus estimates in the outer quarters.

Fermi is not ramping well. After a series of channel checks, Needham believes there is limited supply of Fermi parts (single digit thousands) compared to their previous expectations (hundreds of thousands). Heat (over 200W), poor yields (20-30%) and large die size (550mm2) are reducing availability of Fermi chips and causing further product delays (1-2 months). While AMD is also facing GPU shortages, the firm thinks they are better positioned to take share given their complete product line, higher yields due the smaller die size and favorable price/performance. Because of the limited supply of Fermi parts, Needham believes NVDA will be forced to cut ASPs on its older GPUs in order to protect unit share and match AMD's price/performance, which would result in lower revenue.

Near term GM risk. Given the high cost structure due to the large die size and potentially lower ASPs, they are reducing their GM estimates for FY11 by ~100 bps to 44.3% (vs. prior estimates of 45.4%).

Intel integrated graphics threat. Throwing more fuel to the fire, checks indicate Intel's integrated graphics (Arrandale/Clarksdale) are gaining design wins at the expense of NVDA, particularly in the low-to-mid range discrete GPU market.

Lowering ests. For FY11, Needham ests fall to $3.9BN/$0.80 (vs. $4.05BN/$0.94). For FY12, their ests fall to $4.1BN/$1.00 (vs. $4.25BN/$1.12). While their April ests remain unchanged, they are lowering their July, Oct and Jan ests to reflect a slower ramp of Fermi and potential gross margin risk.

Notablecalls: Needham's Semi team is pretty good & I think their comments of poor Fermi performance at Nvidia will pressure the stock. Fermi has been considered an important (if not the most important) part of Nvidia's future success. If Needham's checks prove to be correct, the co will lose considerable market share to ATI and Intel.

I would not be surprised to see considerable selling pressure in Nvidia stock today and possibly in the coming days.

Stock should be down 50-80c+ or 3-5%+ on this.

Good job Needham!

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