Those who invest in companies that make the inner giblets of computers buy themselves a ticket to one heck of a roller-coaster ride.
For every NVIDIA (NASDAQ:NVDA), there's at least one S3, Diamond Multimedia, or 3dfx. For every ATI Technologies (NASDAQ:ATYT), there's a Cirrus Logic (NASDAQ:CRUS) or Creative Technology (NASDAQ:CREAF).
In short, it's an industry that can give investors incredible short-term profits, but not one where it pays to buy stock and just forget about it.
For the current king of the mountain, Motley Fool Stock Advisor recommendation NVIDIA, times are looking pretty good. The company just recently reported that revenue was up 13%, that gross margin had risen by nearly seven full percentage points, that operating margin had more than doubled, and that net income was up significantly over the prior year.
Of course, NVIDIA isn't just a computer chip company. Sure, it sells a bunch through companies such as Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ), but it also has opportunities such as cell phones from Motorola (NYSE:MOT) and Sony Ericsson.
What's more, it doesn't seem to have fallen into the same trap as past graphics-card makers. It has continued to spend a pretty good amount on R&D, and it seems to be focused on staying on the cutting edge, rather than resting on its laurels and getting fat, without reinvesting in the next generation.
Still, most of its business does come from computers, and product cycles can be brutal in this business, as the gamer community drools over each progressive advance. Don't believe me? Dig into the old SEC filings and read the historic tales of this industry's one-shot-wonders, has-beens, and never-weres.
Is NVIDIA built to last? Geez, I'd certainly like to think so. I like the company, continue to kick myself for not buying the stock back in late '02 (or mid '04), and like where it sits competitively. But, I'm not so crazy about today's valuation. Nor can I completely ignore the ghosts of chip companies past. I'll definitely scout this one again if (when?) it drops, but I'll settle for just playing the computer games it supports for now.
For more chippy Foolishness:
NVIDIA and Dell are Motley Fool Stock Advisor recommendations. If you're looking for great stocks at great prices, let Fool co-founders Tom and David Gardner be your guides with afree trialsubscription to their market-beating newsletter service.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
