Quick Pitch: NVIDIA (Short)

By: SumZero Staff | Published: September 11, 2012 | Be the First to Comment

NVIDIA -- (Nasdaq: NVDA)
Recommendation: Short
Recent Price: $15.90
Target Price: $11.00

Source: Hedge Fund
Location: San Francisco, CA

Overview of the Short

NVIDIA has in the last 2-3 years branched out beyond its core graphic processing (GPU) business into producing processors for mobile devices and tablets (primarily Android). Given the projected growth and growing ubiquity of smartphones and tablets worldwide, NVIDIA has benefitted from an inflated valuation on the tailwinds of this fast growing sector.

The company's historical dominance in producing discrete video cards for desktops and laptops remains a cash cow for the company though this position of power is quickly being eroded by integrated video cards (produced by the likes of Intel (Nasdaq: INT) which has begun to integrate higher quality GPUs into its processors) and NVIDIA's margins have come under pressure as a result.

Quick Valuation
At a valuation of 22x forward P/E, NVIDIA is trading at a significant premium to its closest competitors (Intel (Nasdaq: INTC), AMD (NYSE: AMD), Texas Instruments (NYSE: TXN), Qualcomm (Nasdaq: QCOM), and Broadcom (Nasdaq: BRCM) who all trade at ~14x forward P/E). This premium over these extremely high-quality peers exists despite the headwinds facing NVIDIA in its core GPU business and uncertainty of success in the company’s relatively nascent mobile product line.

Broadly, the issues include:
1) NVIDIA’s GPU unit (64% of total sales) is under heavy pressure from increasing integration of GPUs into CPU;
2) Well-documented decline in desktop and notebook ASPs continue to negatively affect NVIDIA’s margins;
3) Larger competitors displacing NVIDIA as well as pushing down prices for smartphone and tablet chips

Quick Conclusion
The potential drop in revenue and profit will likely not be offset by the company's mobile processor chips given increasing competition from larger mobile chipset players (recently guided FY13 (nearly equivalent to CY12) revenue for its mobile processor line down nearly 50% from $1BN to $540M).

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