NVIDIA: Investment or Speculation?

Stock Advisor NVIDIA (Nasdaq: NVDA  ) discussion board member japeel felt secure in his investment -- until a 70% share-price slide in less than a year spurred him to rethink his thesis.

As an IT professional and avid gamer, japeel understood the industry-leading graphic chips (GPUs) maker's business, and even believed that being the "sole provider of chipsets to Sony (NYSE: SNE  ) and Microsoft (Nasdaq: MSFT  ) for their consoles" suggested a "great moat." In addition, management was lead by a passionate "top class" CEO.

Since then, however, new developments have threatened NVIDIA's dominant position -- and with it, japeel's investment thesis. Though NVIDIA had risen sixfold since 2003, it's plunged recently amid major concerns about the chipmaker's long-term prospects. Has this company's moat sprung a serious leak?

Larrabee leaps the moat
Economics teaches us that capital flows to the best returns. Intel (Nasdaq:  INTC  ) , a chip behemoth with more cash on its balance sheet than NVIDIA's total market cap, aims to see whether this economic principle actually works. It recently announced plans to take on NVIDIA and Advanced Micro Devices' (NYSE: AMD  ) ATI Technologies with a new graphics processing unit (GPU) that Intel calls "Larrabee." Although it's not a GPU specialist, Intel's entrance into this market could cause major hurdles for NVIDIA down the road.

Because of Intel's massive size and scale, and its titantic research and development budget, it can quickly breach NVIDIA's moat. On top of that, ATI Technologies, NVIDIA's primary competitor, recently threw its rival a curveball by lowering prices on recently released GPU's.

It's good to be the king ... until your castle's under siege
These incursions into NVIDIA's niche forced japeel to think twice. He concluded his post (subscription or free trial to Stock Advisor required) with this analysis:

Using a Buffet principle to determine the investment status of Nvidia as follows. Can I say with any degree of certainty that Nvidia, has enough money and expertise to dominate the graphics and parallel processor market, over say, the next ten years, no I can't; five years, no I can't; the next six months maybe, er nope; oops I'm speculating. You might know better, I'm envious of your insight if you do. The market knows that Intel, is pouring tons of cash into Nvidia's space (ref the Larabe), AMD are also going to applying pressure in the PC graphics card market and produce their own integrated graphics option (which I won't be buying). Where does all this energy lead us eventually, graphics integrated with processors which are massively parallel, then Graphics go the same way that sound cards did, from being premium components, to being another included feature, in this case of the processor. Has Nvidia got what it takes, to take on Intel and win? Much as it pains me to say it, nope, I don't think they do and neither does the market...

I'm sticking with my speculation for now, but I don't try to delude myself that it's anything else, I certainly no longer call it an investment. I may be wrong, if I was certain I'd be rich ;o)

After watching how quickly competitors overwhelmed NVIDIA's once-dominant moat, japeel decided that this stock is more speculation than investment. What do you think? What special insights do you have into NVIDIA's or Intel's competitive position? Leave a comment below, or sound off in Motley Fool CAPS.

japeel is not an employee of The Motley Fool, and japeel's opinion does not necessarily reflect that of the Fool

Fool contributor and community analyst John Ballard does not own shares in any companies mentioned.Intel and Microsoft are Motley Fool Inside Value picks. NVIDIA is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 27, 2008, at 1:16 PM, EricCarter wrote:

    Intel has been trying to break into GPU's forever. They also tried breaking into Flash memory. Texas Instruments school them in the flash game and sent Intel packing and I suspect Nvidia will do the same with respect to the GPU market. Intel's driver support and history of lackluster GPU products makes NVDA still very compelling imo. Does anyone really believe that Intel is going to have a product in the next 6 months to a year that will beat NVDA's top of the line card in benchmarks? No one I know who knows anything about GPUs thinks along those lines...

  • Report this Comment On August 27, 2008, at 1:36 PM, tconwa1 wrote:

    Nvidia is a solid company that due to a few unfortunate circumstances finds themselves valued at under 15 dollars. The stock is severely undervalued considering what happened to put them there:

    1. Laptop Chip malfunction makes them take a 180 million dollar hit to fix it and then report lower earnings for the quater. NVDA is a smart company, they don't make mistakes like this, I wouldn't expect anything like this happening to them for a very long time.

    2. AMD, which took over Nvidia's main competition (ATI) in 2006, pulls a fast one and instead of marketing a High end graphics card and then filtering it down to mid range and low range sister cards, as is the custom, decides to put all their product power behind a mid range card at an affordable price with a few low end and high end versions. It is a new strategy for AMD/ATI and is yet to show whether or not it will pay off, but it did accomplish one thing: Nvidia had to lower their card prices to a more competitive level subsequently lowering their earnings for the quarter.

    3. For the first time since time began for Nvidia they missed a deadline. Nvidia has prided itself on always meeting deadlines and now that they have missed their first, Im sure the CEO will be pulling out all the stops to make sure it never happens again. Its just not in their nature.

    _______________________________________________

    Reasons to Buy NVDA:

    _______________________________________________

    1. The company has strong management that knows the tech side of the company just as well as it knows the financial side. They make smart investments and they learn from their mistakes. The management is known to be highly respected and extremely driven.

    _______________________________________________

    2. NVDA has $0 debt and about 1.66 billion in cash to spend as it pleases. Thats pretty impressive, especially since they just announced adding 1 billion into their buyback plan which would boost it to a 2.5 billion buyback. A buyback is something to definitely watch on whether or not a company delivers but with Nvidia, they are more likely to deliver than not.

    _______________________________________________

    3. Also, with all that extra money they have an incredible Research and Design department. They can do stuff like buy the AGEIA PhysX accelerator and incorporate that into NVDA products. PhysX software is widely adopted by over 150 games, is used by more than 10,000 developers of all types and is supported on Sony Playstation 3, Microsoft Xbox 360, Nintendo Wii and PC. And now to get it and its benefits, you have to have an Nvidia graphics card. Smart move I say, because as graphics in our age gets more and more lifelike, the physics engine and how it processes is at its core, and no other company has the industry standard built right into their products like NVDA now gets to boast.

    _______________________________________________

    4. With the HD video movement blowing up right before our eyes, the demand for graphics power that can handle it increases. For the first time ever, an operating system (Windows Vista) has a substantial graphics requirement. Demand for quality products that can handle the load is going nowhere but up, and currently NVDA is the only one that can deliver to par. Not trying to trash AMD/ATI here, but as an owner of products from both companies, and then considering AMD's 7 quarters straight spiral down, Nvidia is the way to go.

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    5. Did I mention the Sony Playstation 3 features Nvidia graphics and is considered in the gaming industry as top quality and power for graphics? In the next 4 years or so, Microsoft, Sony, and Nintendo will be looking to put out their new platforms. Who do you think they will get their graphics power from if they're trying to put out a powerhouse system? You betcha, Nvidia.

    _______________________________________________

    6. Not many people know about it, but Nvidia will soon be the sole reason why you're going to kick yourself for buying an Apple iPhone. Dont get me wrong, the iPhone is truly a product a class of its own, but when Nvidia releases its Tegra series you will know who to call Daddy... Watchout is all I can say. I implore you, if you are reading this go to Nvidia's main site, look under products and go to mobile, and if you didn't already know about it, prepare to change you panties. http://www.nvidia.com/page/handheld.html check it out.

    Apple - basically Nvidia is breaking out into the mobile market. It's about damn time too, Im already sick with apple and there release a product a year bull just because they can and everyone will buy it.. Oh look we're making this new one affordable and cheap, and hey its on the 3G network, just sign a contract that will eventually rape you given enough time and then lets rip off software developers and make them pay out of the ass just to have a piece of the iPhone... Funny thing is, the 3G iPhone is exactly the same as the first, the main highlight being, its on the 3G network. Guess what, the 3rd one is already way in the works and the 4th ones ink just finished drying on the paper...

    Sorry I ranted. I really do like the iPhone as a product, but wouldn't it be nice if a company came out with something along that premise, but with as many top notch features as possible, instead of trickling out improvements and sucking the money teet dry. Which brings me back...

    Tegra Series:

    “All-day media processing” - for 130 hours audio, 30 hours HD video playback

    • HD image processing for advanced digital still camera and HD camcorder functions (up to 12 megapixels still shots and can encode 720p video)

    • Optimized hardware support for Web 2.0 applications for a true desktop-class internet

    experience

    • Display support for 1080p HDMI, WSXGA+ LCD and CRT, and NTSC/PAL TV-Out

    • Direct support for WiFi, disk drives, keyboard, mouse, and other peripherals

    • A complete Board Support Package (BSP) to enable fast times to market for Windows Mobile-based designs

    "If you had a device that could run over, say, 50 hours of audio, and maybe 4 hours of HD video and still have enough battery life left to browse the web or do email for 10’s more hours, that starts to sound like a device that would get a lot more use.

    The Tegra family of computers on chip have been designed from the ground up to deliver stunning HD video, imaging capabilities, desktop class 3D graphics and more in a tightly integrated solution that burns less than a watt during even the most demanding of uses."

    Read a little into the history of this chip series. Think about one of the main companies behind small chip design for the Apple iPhone that made the device possible.. Guess what, remember that 1.66 billion in cash NVDA is sittin on, yeah they bought the damn company for a couple 100 million and came together to design a knockout. Also something very exciting, Nvidia is a Microsoft Embedded Partner. The windows mobile division at microsft is designing their new mobile operating system. Guess what its based off of? You guessed it, Nvidia mobile chip designs from the Tegra series. The new windows mobile is being packed full of features that take full advantage of Tegra capabilities.

    _______________________________________________

    7.Take note that the Tegra Series is only one of many lines of exciting new and innovative technologies. Nvidia has made huge breakthroughs in how scientists do visual computing research on say for example black hole simulations or folding of protein strands.

    _______________________________________________

    In Closing:

    At 14-16 dollars NVDA is a great buy, at 12-14 its a bargain. If you see it drop into the 10 or 11 range, thats a steal, dont think, just buy. For reasons discussed earlier we have the opportunity to buy a great company at discount prices. Im calling it now, NVDA will reach that $40 per share mark again. It may not be this year, it may not be next year, but it will happen... Wouldn't that be nice if you invested now while they're so cheap?

    Please, all comments are welcome, I hope you enjoyed my little rant.

    _______________________________________________

    PS. At NVISION08, which is a huge convention hosted by Nvidia for Industry experts and Nerds alike, it is speculated that new light will be shed on the Tegra series and its consumer availability. On the short term I wonder what that will do to their stock prices in the next couple of weeks... Good thing I already bought them at. Im seriously considering buying more. The point of the article, you should too, what are you waiting for?

    Tyghe,

    Read with interest Jason's e-mail containing your pitch about nvda , I am actually thinking about buying some.

    Read a few reports S&P and Morningstar and they don't like it very much.

    I like to buy things that wall street does not like so maybe you are on

    to something.

    They do have debt $1.1 billion according to morningstar and have heavy

    competition, even Intel is trying to get into business. How big can this mobile biz get for them? As big as i-phone?

    If you have any more info let me know.and keep up the work maybe an

    analyst job on wallstreet is in the cards.

    -Jon

    ___________________________________________________________________

    Hey coach Jon!! Glad to hear from you, it has been a long time.

    As far as the mobile business goes, they are going to severely cut into the smartphone mobile market. Apple nickles and dimes people left and right, and the great thing about Nvidia is they developed this chip and will be selling it to all major phone companies. Samsung to note is one of the biggest. Since the iPhone all of the other companies have been scrambling to catch up and come out with comparable products. But none of them really do compare. This chip will give phone companies the ability to put features in their products that only really the 4th and 5th generation of iPhones would have.. Apple will have to play catchup when these many products come out. It is more a mobile computer with phone capabilities than anything else. This really will change the world in a sense; the way we do things and operate. Go to youtube.com and type in "apx 2500" to see some of their tester phones showing off just a few of the capabilities.

    http://www.youtube.com/watch?v=tsYFXGKUIpE

    Plus you have to admit it is going to be somewhat big if Microsoft Mobile builds their Windows Mobile Operating System specifically for the Nvidia Chip. What will Apple do I wonder?

    And as for Intel.. They are mainly processor oriented and have always been the king in that game. AMD has always been second. Intel plans on releasing I think it was called Larabee or something like that, that is supposed to replace the graphics card. Like I said before in my pitch, Nvidia bought the Physx and incorporated it. It used to be a separate card you could buy for 200 dollars to speed up your game by taking some of the processing load off of the CPU and GPU. It will be used in every major game title pretty much from now on. Nvidia is the only one to have it. Which means the other companies have to make their graphics card or processors alot stronger in order to handle to processing load. Im sure Intel's chip will be amazing, but trying to enter into the Graphics Card market is going to be tough for them. As far as that goes, Nvidia is the top dog.

    Another note for Intel. In business you stick with what you are good at and try not to stray. Take for example McDonalds trying to make their restaurants a little more upscale and appeal to the coffee lounge crowd. Thats going to crash and burn. McDonalds is known for Cheap Fast Food that tastes good and the colors Yellow and Red which invoke hunger. If I had to study for an exam, do you think its plausible that I would go to McDonalds buy a coffee and sit down in that kind of environment. When a friend calls up can I really see myself goin "yeah man, Im just chillin at McDonalds with my Iced Coffee studying for my Physics of Liquids class..." Intel is great at processors, but as far as their integrated graphics... They lack. They will have to pull out something truly amazing in order to compete.

    With Nvidia, I just imagine how much revenue they could generate from just that new chip line alone and selling to all the major phone companies, they are going to eat it up.

    Check this out for all of Nvidia's Content and Industry partners.. The Prospects are quite exciting.

    http://www.nvidia.com/object/handheld_devpartners.html

    This one has Industry Associates:

    http://www.nvidia.com/object/hh_industry.html

  • Report this Comment On August 27, 2008, at 2:06 PM, owensmama wrote:

    tconwa1, I have to disagree with you.

    First, how can you assert that "Nvidia doesn't make mistakes like this" when they just did, and it was an expensive mistake to make! At least $180 million, plus the lost brand equity plus the damage to their OEM relationships. That's huge.

    Second, ATI/AMD didn't "pull a fast one" on Nvidia by releasing a mid-range chip instead of a high-end one, they changed their strategy to destabilize a market leader, and it worked! Nvidia had to drop their price and is losing market share by many accounts. Nvidia's CEO even admitted that they underestimated their competition, and it's not the first time they've done that.

    Third, this is not the first time they have missed a deadline. NV 30 was hugely late and when it was delivered it was lack lustre at best. Yet another example of them underestimating the competition.

    Fourth, how can you say that because Nvidia is in the PS3 it will be the choice of the future? Nvidia was in the first XBox bit it was replaced by an ATI chip in the second generation. And ATI has been in both the Nintendo Gamecube and the Wii (the best selling console this generation and maybe ever).

    Fifth, don't be so fast to proclaim Nvidia a leader in the handheld market. They have been playing in this space for years now and have generally failed at monetizing their products while ATI has sold over 250 million chips and has licensed IP to some of the top mobile device companies (freescale, qualcomm and STMicro). Read the fine print on Nvidia's marketing -- their claim of 130 hours of audio? That's with a battery that's twice the size of most mobile devices, and that's at a time when several competitor's are claiming 100 hours audio playback on a standard cell phone battery.

    I have to say that Nvidia may very well be a successful company, and may be a worthwhile inventment, but not for the reasons you've listed here. Take a step back, put down the Koolaid and do a real evaluation, don't just spout marketing claims.

  • Report this Comment On August 27, 2008, at 3:15 PM, EricCarter wrote:

    It's funny that the author says that Larrabee leaps the moat. How so. To my knowledge Larrabee hasn't lept anything. Hasn't even lept out of the theoretical department into real world benchmarking. Someone show me a Larrabee design running OpenGL with faster FPS than a top of the line Nvidia card and then you'll have something. Until then, Larrabee is a lot of talk and no substance.

  • Report this Comment On August 27, 2008, at 6:11 PM, TEBuddy wrote:

    I agree with all commenters in a way.

    Nvidia is a good company, I like their new mobile system on a chip stuff, but I think AMD/ATI is ahead of them in every department. AMD has been making these mobile systems on a chip for a while with the Geode, and will soon release something to replace it that might dwarf the Tegra.

    I dont think Intel will be much competition just yet to real performance video cards, but it might replace integrated graphics. But once again AMD is way ahead in all this too, with the best current IGPs, the most advanced chipsets, and in less than a year will have laptops running on one CPU/GPU chip.

    The PS3 uses technology that was a collaboration of several tech companies, so Nvidia can't take all the credit for its ability, and my PS3 sounds like a wind tunnel when you start using it, can fry some eggs on it.

    And Nvidia has $1.6B, but is buying back how much stock did you say? $2.5B. Well sure, some of its already been bought back, but the point is they haven't finished the last buyback and the together with the supposed new buyback it will make them broke, so it doesnt make sense, and its not going to happen.

    They may be slightly undervalued, but this is not going to be another $40 stock anytime soon, or ever, unless they break out into other products to grow. I see it going to $17-18 over the next 3-4 years for a reasonable price to earnings ratio, so still an OK buy for some good long term return on investment.

  • Report this Comment On August 28, 2008, at 1:06 AM, none0such wrote:

    To be fair, a board approval of a buyback is not the same as a buyback - there is no obligation to complete or complete in a timely fashion the buyback. The announcement of the additional allocation seems to take advantage of the undervalued stock price (good management?) but at the same time projects a defensive posture (bad management?). In other words, free cash flow will be expended to buyback shares which may or may not be a good decision.

  • Report this Comment On August 28, 2008, at 2:23 AM, JFrazer1 wrote:

    I believe NVDA is still attractive, but obviously not as attractive as before. The question is, is it really 70% less attractive then a year ago, or is that an oversell?

  • Report this Comment On August 29, 2008, at 11:08 AM, Hfish1212 wrote:

    Oh sure, Intel is going to support driver updates for all the current games and applications. NOT. Intel has been saying for over a decade now that they are entering the graphics market, talk talk. They'll make another low end product or maybe something better but then give up when they realize how much effort and money it takes, like they always do. Anything else is just pie in the sky.

    AMD is dieing and threw a hail-mary, thereby reducing revenues for them self and Nvidia. That was a move AMD could least afford to do but that's the only strategy AMD ever uses, where has it gotten them against Intel? Just so happens this occurred right when Nvidia had a few stumbles.

    Nvidia plays up to third party much better than either AMD or Intel, who are just making products for them self. There is plenty of room to grow in new areas so Nvidia is making sure to focus on them (unlike AMD or Intel).

    I think Nvidia is leaving the motherboard chipset market and will be missed but they seem to understand better than AMD or Intel that you can't be an expert in all areas. If they stayed in that they would have to compete against Intels new stuff. On-board graphics will never compete against add-on boards becuase on-board can't be upgraded. I don't think they realized 5 years ago the amount of processing power they'll need to put on a motherboard to be equal to an add-on. Heck, most add-ons are going to SLI designs which allow multiple boards to increase their proformance even further. There is no way motherboards can be made big enough or chip size reduced small enough to fit all that.

    The holidays are coming up. Nvidia has new products and a lot of fairly new ones that will shine. It will be another bumper crop of sales for them and all the current fuss will be forgotten.

  • Report this Comment On August 29, 2008, at 6:35 PM, TEBuddy wrote:

    Hfish1212, do you know what you are talking about? Nvidia failed to dominate in certain areas so you write it off as those aren't important? What share of people do you think use high powered graphics? The majority of sales come from best value low cost business purchases, with integrated solutions, which is why AMD is getting a lot of Governement business, with Government offices all across the country using AMD computers chipsets and CPUs.

    AMD/ATI is well ahead of Nvidia in technology, in manufacturing, architecture, and memory. Nvidia will again benefit from ATI's development of higher bandwidth memory as they did with GDDR3.

    Nvidia is no slouch, but their competition is nothing to shake a stick at either. You are being too biased. Besides ATI makes plenty good performance cards too, so its not like Nvidia doesnt have competition in the market you think they will continue to dominate. And what market is Nvidia jumping into that someone else doesn't already compete?

    It will be a tough road, but I agree Nvidia is a good buy right now. I got some when it was a little lower, but I also own some AMD and Intel since it bottomed out too. I think they will all go up, but I dont think Nvidia has some great advantage in any market right now.

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