At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the best ...
It's earnings day for NVIDIA
Hey! Wait! Where's everybody going?
NVIDIA will self-destruct in 10 minutes. 9 minutes. 8 minutes ...
Ah. I see. You heard about the downgrade, didn't you? Yesterday, just a day and a half before earnings, JMP Securities burst NVIDIA investors' bubble. According to the analyst, not only will this evening's announcement not produce the expected blowout -- it's almost certain to result in a blow-up for NVIDIA stock.
The problem, says JMP, can be summed up in one word: Tegra. Incorporating popular ARM Holdings
While Tegra won pride of place in the new Asustek Transformer tablet computer and has roughly 85 other computing products in its repertoire, JMP points out that this dwindles in comparison to the hundreds of design wins notched by Qualcomm and TI. In particular, TI has taken valuable real estate within Motorola's
Danger! Horror! Get out!
Worryingly, JMP points out that the Tegra 3 chip is supposed to be a super-chip, designed specifically to work in high-end smartphones and tablets. But Samsung, which was said to have placed large Tegra 2 orders, is now believed to be passing on it and is leaning toward using chips made in-house -- or just as bad (for NVIDIA), toward Qualcomm's Snapdragon -- for use "in the 1500MHz Superphone category." Meanwhile, the greatest growth in tablets appears to be not in the high-end category -- where NVIDIA placed its bet -- but in "lower priced Kindle Fire and Nook Tablet class entries that use OMAP."
Let's go to the tape
So, bad news all around, right? Best sell those NVIDIA shares now before the bad news breaks this evening?
Not so fast. Before you rush right out and liquidate your NVIDIA stake, you might want to take a quick look at the record of the analyst shouting "Kindle Fire!" in a crowded movie theater. Because as it turns out... JMP really isn't that great of a semiconductor analyst.
According to our CAPS scorecard, where we've been tracking this analyst's progress for more than five years, JMP Securities is in fact a pretty terrible predictor of chip stock success. On average, only 27% of this analyst's recommendations have turned out as predicted. The other 73% underperformed the market. (Here, see for yourself.)
Of course, if you flip this statistic around, it's still true that JMP is right on the money one time in four. And yes, it's entirely possible that today's earnings report that will prove the rule -- that NVIDIA will flub the quarter, or perhaps win the quarter, give disappointing guidance and see its stock crash anyway. Over the long term, however, I have to believe that long-term performance matters.
In NVIDIA's case, we're looking at a company that's expected to grow its earnings at 15% per year over the next half decade -- yet sells for just 11 times earnings, ex-cash. A stock that's even cheaper when valued on actual free cash flow, rather than GAAP "net income." Personally, I don't know whether NVIDIA will thrill or terrorize the analysts with its report tonight. What I do know is that, based on the numbers as they stand right now, the stock looks cheap. Should it happen to sell off tonight, you'll find me standing in line to buy it tomorrow.
(Although I'll have to tap my foot a few days while I wait in line. Per the Fool's ironclad disclosure rules, I can't actually buy the stock for three days after this column publishes.)
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Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 304 out of more than 170,000 members. The Motley Fool owns shares of Texas Instruments and Qualcomm. Motley Fool newsletter services have recommended buying shares of NVIDIA and Amazon.com, as well as writing puts in NVIDIA. 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.