NVidia stock taking a beating

[JeffL]

Noticed that NVidia stock is taking a beating - a brokerage firm changed it's rating to "Hold" - which in brokerage terms means "sell like crazy" (Sell is almost never used.) They revised their target price for NVidia from $52 to $20, citing a trend in which they believe the overall market is moving to "low end and mid range" computers, which they feel is not NVidia's market.

[Reeko]

...the overall market is moving to "low end and mid range" computers, which they feel is not NVidia's market.

I don't know about that. What about the nForce chipset?

[Jason Cross]

Analysts in the graphics business piss me off almost as much as in the games business. Self-fufilling prophecies - they say the stock will go down, so people sell it, and like magic, it goes down! Genius!

Yes, the volume sales already are, and will continue to be, in mid-range and cheap computers. Believe it or not, botique computers in the high end has been growing quite well too (see the New York Times feature on Alienware: http://www.nytimes.com/2002/06/24/technology/24WHIT.html)

But the margins on those cheap cards kinda suck, and the margins on those expensive cards are fantastic.

The analyst who lowered the rating to a "hold" did it on the specualtion that, worst-case, NV30 won't ship this year. The idea being that TSMC's .13 micron process isn't ready yet. I think he's being way over-cautious.

TSMC will ship other .13 micron chips this year for other customers of theirs, and so will UMC. Those chips won't be as complex as NV30, but NVIDIA always leads TSMC's process technology.

It's still too early to tell exactly when they'll ship. NV30 taped out at the end of May, that much is public. The last three high-end cards NVIDIA produced took about 105 days or so to go from tape-out to the first vendor shipping product. That's very impressive, for those who don't know chips. Anyway, if they repeat that, they ship in mid-Sept. If it takes them another month, they hit Oct., and they still get in the Christmas OEM deals. If they're after that, they only get Christmas for the add-in card market, except for the boutiques.

NVIDIA will make many millions of dollars this quarter, next, and the one after. I've never understood how companies that make plenty of money have their stock take a dive and companies that lose a ton of money have their stock go up.

In the wake of WorldCom, everything is taking a beating.

[Dave Long]

Isn't NVIDIA under investigation by the SEC though? Aren't they also in litigation with Microsoft over Xbox? These things have to be contributing factors. It was easy to see way back when the TNT was released that NVIDIA was positioned far better than 3dfx and would eventually lead the graphics market. Now with these legal issues and a slow down in PC buying overall, they are in a precarious position. ATI really has stepped up their program too.

--Dave

[JeffL]

Hey Jason, thanks for the analysis - very informative. I'm really ignorant about the video card "behind the curtain" biz.

Analysts in general piss me off. They're never wrong. There's the self-fulfilling aspect, as well as their ability to change their mind whenever needed, such as this analyst who changed his forcast for NVidia stock from $50 to $20.

I had to give a pitch a few years ago when our company had their regular hosting of about 150 securities analysts. I shared a dinner table with these guys, cocktail party (you talk about people trying to get you drunk and then prying info out of you! LOL!), and then my presentation. There are some sharp cookies, no doubt. But what was eye-opening was how many of these guys and gals, who were going to go back and make their recommendations that would ultimately have more effect on our stock price than any real performance data, had not a clue as to what we were talking about. It was like chickens watching card tricks. I was utterly dismayed at some of the questions which revealed they didn't understand even the most basics. Not all, again - but enough that it was truly disheartening.

[Jason Cross]

Isn't NVIDIA under investigation by the SEC though? Aren't they also in litigation with Microsoft over Xbox? These things have to be contributing factors.

--Dave

The SEC investigation is over. They were, just after ENRON, feared to have done the same thing with misreporting earnings. They did an audit for the SEC, and it turns out they did miscalculate earnings: they UNDERreported them a bit. Turns out they made marginally more money than they had originally reported.

The litigation with MS is still underway. Such litigation is very common in that business and often ends up making bedfellows. IE: SGI was suing NVIDIA, they settled amicably, and partnered up with them all buddy-buddy. And now a lot of SGI's former best and brightest work for NVIDIA.

The MS case cannot make matters worse for NVIDIA. The argument is that MS isn't paying enough for the Xbox chips. If NVIDIA loses, they keep getting paid what they are now and their situation doesn't change. If they win, MS has to pay more, and it's a windfall for NVDA. Sure the suit is expensive itself and so on, but I just mean the potential outcome shouldn't rattle investors too much.

[Jason Cross]

Oh, and though NVDA has taken a beating (well it WAS overvalued, but shouldn't have dropped this far), here are some other stocks of discrete graphics companies:

NVIDIA - 17.18
ATI - 10.61
Trident - 6.22
Creative - 8.98 (owns 3DLabs now)

[Brad Grenz]

The argument is that MS isn't paying enough for the Xbox chips.

It's actually Microsoft's lawsuit. They think they're paying too much for Xbox chips and that nVidia is screwing them over. Sounds like MS agreed to certain pricing but wants to change the deal now.

[Dave Long]

It's actually Microsoft's lawsuit. They think they're paying too much for Xbox chips and that nVidia is getting screwed over. Sounds like MS agreed to certain pricing but wants to change the deal now.

That's what I thought was going on too. That's not really something that just blows over. It sure didn't seem like NVIDIA is all that happy to cut the price of their chips just because MS got in a bit too deep with Xbox and had to cut the price so soon.

--Dave

[Mark Asher]

It's just one of those things where you'd really have to see the contract. There may be a provision in it that if nVidia's raw materials become cheaper, they have to pass along those savings to Microsoft via price cuts. I doubt Microsoft would have willingly locked themselves into a fixed price without some kind of wiggle room.

[Jason Cross]

D'oh! Brad's right... it's the other way around.

That could definitely cut into NVIDIA's profits, thought not as deeply as people would think. The margin is thin on those Xbox chips, and the whole thing accounts for like maybe 20% of NVIDIA's revenue for the next year. It's not going to break them, but it could cut their net profit down by 15-20% for the whole next fiscal year if they're made to change the pricing and apply it retroactively to a certain point.

Oh, and I should note that I did not intentially leave Matrox out of the other stock listings. Matrox is like the last private company in the universe, so they don't have a stock price. =) (they're also 25 years old, making them the oldest surviving company of their kind)

[Desslock]

>Oh, and though NVDA has taken a beating (well it WAS overvalued, but shouldn't have dropped this far), here are some other stocks of discrete graphics companies:
>NVIDIA - 17.18
ATI - 10.61
Trident - 6.22
Creative - 8.98

Stock price numbers are meaningless without reference to share capitalization. Comparing share price to get an idea of a company's performance or value would only work if the companies had the exact same number of shares outstanding.

Heh, that said, the companies are valued currently in the same order as their share price, with Nvidia way on top:

NVidia 2,610,913,320
ATI 1,581,035,640
Creative 703,259,720
Trident 84,119,280