Last Wednesday, NVIDIA
Is all the recent pessimism from investors reading more into NVIDIA's results, or is the company just suffering from the laws of financial reality: The faster you rise, the harder you fall?
But first, back to NVIDIA's quarter
Looking at NVIDIA's results, a lot of attention was paid to its solid earnings beat. For the most part, I don't really care about last quarter. The company performed well and gets its gold star from analysts, but this is a company undergoing a massive transition in its product lines. I'm more concerned about the future.
In that regard, last Wednesday's earnings were very encouraging. First off, the company disclosed that their supercomputing Tesla line is now a $100 million business. That might seem trivial to a company with $3.5 billion in sales last year, but consider that it's ramping extremely quickly. NVIDIA released its CUDA programming language in 2007 and saw $1.4 million in Tesla sales that year. Tesla ramped to $7 million in sales in 2008, $27 million in 2009, and finally hit $100 million this year.
Source: NVIDIA reports. Dollar figures in millions.
With the product line nearly quadrupling year over year since its creation and support from major OEM's such as IBM, Dell, and HP, Tesla should continue showing high growth rates. In fact, despite NVIDIA's very profitable high-performance segment coming under attack from Advanced Micro Devices
Kal-El: Out to market faster than a speeding bullet
Then there's Tegra. Being at the center of the tablet and smartphone revolution, Tegra hogs most of the headlines around NVIDIA. Once again, I was less concerned with how the chip fared last quarter and paid more attention to Tegra's long-term potential. Believe it or not, we're still in the early stages of a tectonic shift to tablets and smartphones. So while a host of Tegra wins at the Consumer Electronics Show looked nice, the processor's long-term positioning is most important.
In this regard, the company delivered. Main competitors Qualcomm
The importance of this news can't be understated. In tablets, getting to market first ahead of key launch periods is extremely important. On Texas Instruments' last earnings call its CEO attributed NVIDIA's success with Tegra 2 to beating TI to the punch by "a couple of months, maybe a quarter." With Quad-core designs announced roughly a year behind previous models, my read on the situation is that NVIDIA has once again hoodwinked the competition by at least a quarter, and next holiday season will continue to be the dominant processor in a growing tablet field.
For all the talk about "raw horsepower," NVIDIA looks to have the lead in another key battle that gets little attention: sampling designs to manufacturers and getting to market first.
A market pullback
After last Wednesday's earnings call, my confidence in NVIDIA's outlook, especially with regard to key growth areas, looks stronger. For investors who felt a bit queasy seeing 14% of their position lopped off NVIDIA in two days with little news from the company, be aware of the laws of financial gravity.
Like it or not, NVIDIA has ridden a wave of mobile device optimism northward in recent months. In spite of these prospects, the company still faces strong challenges. For example, while NVIDIA does have strong prospects going forward, the company is still 27% below the revenue peak it saw in early 2008.
So when a market pullback like the one seen in the past two days hits, high-flyers are naturally hit the hardest. NVIDIA wasn't alone. Other semiconductor companies connected to the smartphone boom that have seen huge price run-ups like TriQuint
In the case of those companies, their valuations look in line with current contracts and the near-term size of the smartphone market. In NVIDIA's case, its tablet-driven future is more speculative and its price tag higher, so it's not a surprise to see the company fall the hardest in a fearful market.
Looking forward, I think investors should keep an eye on NVIDIA's financial analyst day on March 8. Aside from updates on how the company sees Tegra shaping up in the year ahead, more guidance will be given on its core graphics cards business (oh yeah, NVIDIA still sells those!), an updated figure on Tesla's projected 2011 revenues should be given, and most importantly: More clarity will come forward on the company's ambitious Project Denver initiative.
And that's really the key to NVIDIA. Until investors receive more information on Project Denver, which should have high research expenditures devoted to it in the coming years, a high component of the company's future revenue and efforts remains in the shadows. Investors have definitely been excited by the concept of Project Denver, but "concept" and market opportunity are often two different matters.
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