NVIDIA CORP. $12 (Nasdaq symbol NVDA; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 554.7 million; Market cap: $6.7 billion; WSSF Rating: Average) specializes in 3D graphics chips for computers, video game consoles and other electronic devices. The company focuses on chip design, and outsources most of its production to chipmakers in Asia.
Nvidia got as high as $40 in October 2007, but has dropped recently due to fears that a slowing economy will hurt computer sales. Strong price competition from chief rival Advance Micro Devices, which makes graphic chips under the ATI brand, could also hurt Nvidia’s profit margins.
The company now feels its revenue in its second fiscal quarter ending July 27, 2008 will fall to between $875 million and $950 million, down from its earlier forecast of $1.1 billion.
Nvidia is also having quality problems with some of its chips. The company now expects to take a one-time charge of $150 million to $200 million to cover the costs of replacing and repairing certain graphic chips in notebook computers.
The charge is nearly equal to the $211.8 million or $0.36 a share that Nvidia earned before unusual items in the three months ended April 27, 2008. These defective chips use older technology than its newer models, so these problems should not affect Nvidia’s future earnings.
The long-term outlook for the graphic chip industry is bright. Strong consumer demand for video games with lifelike images and motion should continue to drive sales of Nvidia’s 3D chips. As well, rising sales of smartphones with large graphical displays should spur demand for Nvidia’s new Tegra chip, which uses much less battery power than current mobile chips.
Nvidia maintains its leading share of this niche industry by spending about 17% of its revenue of$7.30 a share on research. Nvidia’s recent acquisition of gaming software specialist Ageia Technologies should also improve the performance of its chips.
Nvidia’s low stock price could make it an attractive takeover target for a larger chipmaker. However, you should treat the company’s takeover potential as a bonus, and not the sole reason to invest. The stock now trades at 15.8 times Nvidia’s projected fiscal 2009 earnings of $0.76 a share.
Nvidia is a buy.
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