Are Short-Sellers Onto Something at NVIDIA?

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone, but short-sellers. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into profits.

Below, we take a look at graphics chipmaker NVIDIA (NASDAQ: NVDA  ) , which saw a 64% jump in shares sold short, though it only amounts to around 4% of its float, so its short interest ratio is only two days to cover. Don't expect a short squeeze here. Let's see if the chip maker has the power to make short work of short-sellers.

NVIDIA snapshot

 

 

Market Cap

$7.8 billion

Revenues (TTM)

$4.1 billion

1-Year Stock Return

(13.2%)

Estimated 5-Year EPS Growth

10.1%

Return on Investment

10.9%

Dividend and Yield

$0.30/2.4%

Recent Price

$12.53

Shares Short Nov 30

22.6 million

Shares Short Nov 15

13.7 million 

% Change

64.6%

CAPS Rating

****

Sources: wsj.com, FinViz.com

Just because the shorts are piling in doesn't mean that you should, too. Such stocks could have serious problems that warrant their short interest, but they might also just be stricken by short-term troubles. Only Foolish due diligence will tell you for certain.

The short story
To hear some analysts tell it, NVIDIA is a zombie: it's dead, but it just doesn't know it. What else can account for the somnambulistic condition of the PC market, but NVIDIA recording 13% growth in sales, and a 17% growth in profits, record levels for both? They say those sales just can't keep pace with the death of the PC, so it's only a matter of time before the chip maker wakes up to the fact it has one foot in the grave. It might be gaining market share, but that's reflected in its price .

I think the market could do with a whole hoard of zombies, then, if that's how they're going to perform.

The PC market is indeed slowing. According to the market researchers at Gartner, global PC shipments fell 8% in the third quarter, to 87.5 million units. But some of that can be blamed on the weak back-to-school season that retailers experienced, and the advent of the new Microsoft (NASDAQ: MSFT  ) Windows 8 operating system. Retailers had product on hand that they needed to get rid of first, particularly with the new OS due out .

Intel (NASDAQ: INTC  ) warned about it back in September, saying there was weak demand, and lowering its guidance. Hewlett-Packard (NYSE: HPQ  ) , one of Intel's chief endpoints for its chip, is mired in the global malaise, but also entangled in a drama of its own making over the acquisition of Autonomy and allegations of fraud. It's a seriously distracted player, which explains why Lenovo became top dog in worldwide PC shipments for the first time ever .

Such distractions have helped NVIDIA take share. Tablets and mobile computing are on the rise, becoming the fastest-growing product category in the consumer electronics industry. The industry's trade association says that sales should hit $29.1 billion this year, up 83% from 2011. In fact, tablet shipments are expected to surpass notebooks in just a few years.

NVIDIA has an envious lineup of partners, including Google's (NASDAQ: GOOGL  ) popular Nexus 7 tablet, and Microsoft's own new tablet, Surface, that opened to rave reviews. While Apple (NASDAQ: AAPL  ) has chosen to stick with its internally-developed ARM Holdings' (NASDAQ: ARMH  ) processor, the Tegra chip is doing just fine, achieving record sales, while the GPU business continued to grow, despite a weakened market. In short, NVIDIA is poised to capitalize on the fastest-growing segments of the computing industry.

I've had a long-term outperform rating on NVIDIA on CAPS, which I don't plan on changing, but tell me in the comments section below whether you agree with analysts that this is really a case of the walking dead.

Don't sell yourself short
Share your views below on whether short sellers should be squeezed till it hurts, or if the stock ought to be shorted till the sun don't shine.

NVIDIA was ahead of the curve launching its mobile Tegra processor, but investing gains haven't followed as expected, with the company struggling to gain momentum in the smartphone market. The Motley Fool's brand-new premium report examines NVIDIA's stumbling blocks, but also focuses on opportunities that many investors are overlooking. We'll help you sort fact from fiction to determine whether NVIDIA is a buy at today's prices. Simply click here now to unlock your copy of this comprehensive report.


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