As Fear Sweeps the Market, NVIDIA Plummets

Last Wednesday, NVIDIA (Nasdaq: NVDA  ) released earnings that smoked analyst expectations. The stock promptly rose nearly 10% the following day as the investing world put a stamp of approval on the results. However, after a couple brutal Nasdaq trading days, NVIDIA has shed 14% and sits below its pre-earnings price.

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 (NYSE: AMD  ) , Tesla was able to make up for a downturn in NVIDIA's much larger Quadro segment last quarter. Early into its adoption, Tesla is already throwing its weight around on the top line.

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 (Nasdaq: QCOM  ) and Texas Instruments (NYSE: TXN  ) both recently announced advanced next-generation "Quad-Core" chips targeting mobile devices. NVIDIA didn't miss a beat, though. It gave more than just a PowerPoint slide on its next generation, and instead announced it was already sampling its next-generation Tegra processor now known as Kal-El.

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 (Nasdaq: TQNT  ) , Cirrus Logic (Nasdaq: CRUS  ) , and Skyworks (Nasdaq: SWKS  ) were all hit hard as well.

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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Fool contributor Eric Bleeker owns shares of NVIDIA. You can follow his articles and musings on Twitter @bleekertech. NVIDIA is a Motley Fool Stock Advisor choice. The Fool owns shares of Cirrus Logic, Qualcomm, IBM, Texas Instruments, and TriQuint Semiconductor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 24, 2011, at 9:29 PM, TEBuddy wrote:

    Still WAY overpriced, needs to be half the price its at. And people complain about oil speculation.

  • Report this Comment On February 24, 2011, at 10:27 PM, BuyemHoldem wrote:

    It's priced higher than gold with the P/E of a start up...

  • Report this Comment On February 25, 2011, at 1:54 AM, jwtrotter wrote:

    I'm amazed at how clueless people are about investing regarding Nvidia. PEG is as important or more so with this type of growth stock. Forward P/E and PEG are actually or a little below what would be a fair valuation if you really looked at this stock instead of one number without studying the company what's estimated and down the pipeline conservatively.

    Also the title of this article is really deceptive which confirms my opinion of most Fool articles. TEBuddy is way off on his assessment of this company. Half the price? Please, keep wishing, only so you can buy it yourself then.

  • Report this Comment On February 25, 2011, at 4:14 AM, einzling44 wrote:

    NVDA is a MFSA choice? Why exactly? Once INTC pays them, they can go to single digits or even out of business easily.

  • Report this Comment On February 25, 2011, at 9:50 AM, TMFRhino wrote:

    jwtotter,

    I'm still amazed how clueless people are about using the PEG ratio :). Honestly though, if you'd applied a PEG ratio to the stock three years ago you might have seen 20% growth and a 20 P/E. Since then we've seen negative growth. It's bunk... You single me out for looking at one number when this article is a look at several product lines and their FUTURE capabilities. In fact, your approach (looking at two numbers (Earnings/Analyst Growth), instead of one) is the definition of not studying a company in my opinion. You're basing your assessment on analyst estimates that could literally be pulled out of thin air for all you know. Maybe you should run your own projections of what kind of market share in tablets / tablet market size / high performance computing growth / ability to grow in their graphics card biz is needed for their valuation and then you could get back to me about studying the company. If you claim they're cheap compared to a "conservative" pipeline, I don't believe you've done this exercise in an honest fashion.

    I've owned NVIDIA since late 2008, and re-bought the stock last year around $11. Clearly I must like something about it if I continue owning it. However, to deny that the stock is more speculative when we know 1.) Very little about Denver 2.) Tablets are *just* taking off, and the success of Android tablets isn't assured is being dishonest. I appreciate several of the company's prospects, but as it grows in value and its core business line is more susceptible, I'm aware of the risks surrounding the company.

    And what's deceptive about the article title? We've seen "fear" index levels soaring lately, NVIDIA lost almost 15%, people are probably wondering what's going on with the company. That's what we looked at.

    -Eric

  • Report this Comment On February 25, 2011, at 10:57 AM, jwtrotter wrote:

    Well Eric, you're showing me in your reply that you are VERY defensive and insecure. I was responding to the other comments and actually pointing out that you can't look at just one number and using the PEG number as an example along with forward P/E. I wasn't really criticizing your article in terms of content as much as a title that basically focuses and feeds on the FEAR, then write something that really isn't about the fear. So your long response to me really should be directed at the other commentators. I own shares of NVDA and have ended the up and downs lately seeing enough growth in the near future to expect higher price points etc. Believe me I've done a little more research than you seem to imply in your response. Take a chill pill please.

  • Report this Comment On February 25, 2011, at 11:30 AM, TMFRhino wrote:

    Sorry if I misinterpreted you comment, not looking to come off as a bully or anything. I was just looking to raise some points for debate around the company. You know, if that came off as needing a "chill pill", I apologize, wasn't the intention at all. The length of the response isn't some overwrought reaction, I just don't know how to stop typing :).

    I'd hope that people who read the article saw that while acknowledging we're in an environment where "fear" was creeping back in, there was an honest look at why NVIDIA might be dropping more in reaction to that.

    Best,

    Eric

  • Report this Comment On February 25, 2011, at 12:23 PM, TEBuddy wrote:

    trotter youre a fool, plain and simple. Tell me where these forward earnings are justified. They assume the market is standing still, and competition isnt making better products while Nvidia is developing theirs. You think, a company can just say, we are going to go do this thing, and that is going to be successful? Nvidia's greatest accomplishment has been to buy out as much of its competition and kill thier product lines. Unfotunately they can't do that in this market, with larger competitors, meanwhile falling behind in their core business.

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