The analyst community is surprisingly giving NVIDIA (NASDAQ:NVDA) a cold shoulder following news out last night the co has settled all pending litigation with Intel & has entered into a six-year, $1.5B cross licensing agreement.
The payment, net of ~$100M attributed to the settlement of prior legal claims, will be amortized over the 6-year term and result in a $233M operating income or ~$0.29 EPS increase per year.
– JMP Securities is downgrading NVDA to Market Perform from Outperform saying they believe the strongest of the near-term catalysts that the market had been anticipating are now effectively priced into the stock. Firm’s new FY13 EPS estimate of $1.25 takes into full consideration a strong-case scenario with regard to the ramp of Tegra solutions into new Motorola, LG, and Microsoft smartphones and tablets. As such, they are moving to a Market Perform rating given their belief that the current trading level of ~18x their new FY13 estimate represents an appropriate midpoint to the stock’s five-year trading range of 8-28x and adequately reflects the upside potential of emerging tablet and smartphone exposure as well as the downside risk of its legacy notebook and PC exposure.
The company’s emerging tablet and smartphone opportunity is promising and reflects the sound strategic vision and execution of management but remains to be proven given still-uncertain launch timing and market acceptance of its new design wins.
New market opportunities are growing but so is the competitive landscape as Nvidia expands beyond a more PC-centric business model. In addition to ongoing competition with Intel and AMD (MP), it is also now competing against the Apple A4 (MO, $400PT, DCF-based), the Samsung Hummingbird, the Qualcomm Snapdragon (MO, $60PT, P/E-based), TI OMAP (MP), and the Marvell Armada (MO, $30PT, P/E-based), among other ARM solutions.
JMP cautions that monthly data out of Taiwan closed out 2010 on a weak note (excluding Hon Hai) with December quarter notebook ODM revenues declining -12.7% q/q (-23% y/y), OEM revenues rising a below-seasonal 1.8% q/q (-6.4% y/y), and TSM revenues falling -2.3% q/q (decelerating to +10.8% y/y). While Nvidia may be benefiting from some of the Hon Hai growth of +8.2% q/q (+83.8% y/y), the firm believes the strength is skewed toward iPhone and iPad products where Nvidia does not participate. They would look to become more aggressive on Nvidia once near-term PC uncertainty resolves itself and/or there is better visibility on new tablet success prospects.
– J.P. Morgan is also out cautious (as ever) reiterating their Underweight rating and $13 target saying they believe the market has already discounted overly-optimistic expectations.
The stock has increased over 130% since its trough in late-Aug’10 (vs SOX + 40% and SPX +21%), and up 36% YTD (SOX +4.5% and SPX +1%). Much of that run-up was due to the high expectations for the ramp of Tegra 2 and the optimistic anticipation of NVDA being a major beneficiary of the burgeoning tablet market, in firm’s view. Although it is true that NVDA has gained numerous Tegra 2 wins in smart phones and tablets, as was readily apparent at last week’s CES, the resultant volumes have yet to materialize.
According to J.P. Morgan’s IT Hardware analyst, Mark Moskowitz, coming out of CES, there are indications that the tablet market is already setting up for a major components oversupply situation later this year or in early 2012. He estimates that more than 40 tablet vendors will manifest in the coming months, all of whom will be competing aggressively to catch up to the Apple iPad. Given his estimate that Apple will control 60% of the 46M tablet shipments that he forecasts for 2011, the remaining 40 vendors will end up battling for the remaining 18-20M tablets in the market. JPM’s IT Hardware analyst posits that “many of the vendors believe that they can carve out a meaningful piece of the market”, and, consequently, build inventories in excess of what they can sell.
JPM believes the stock is currently trading at an unsustainable premium to the group. Post the settlement announcement, NVDA traded at ~$22 in the aftermarket. Taking into account the ~$0.29 earnings increase from the licensing payments on top of their C11 GAAP EPS estimate of $0.70, the stock is currently trading at a 21.5x multiple, which represents a 13% premium to the average stock in our universe. Given the headwinds that company still faces, the firm believes that this premium is unsustainable and, consequently, they reiterate their UW rating.
Notablecalls: Pull up NVDA chart and look at the 5-6 pt run the stock has had over the past week or so. People were clearly betting on CES & the possible INTC settlement. Now both catalysts have passed.
The stock was up 6% in after hours trading but that was clearly dumb money buying.
So, this morning we have a tier-2 firm downgrading the stock and JPM saying there are indications that the tablet market is already setting up for a major components oversupply situation later this year.
For objectivity’s sake:
– UBS upgraded NVDA to Neutral from Sell last night. Unrelated to INTC news, btw.
– Citi reits Buy and $20 price target this morning…and get this..calling the name their Top Pick at current levels. (Say what? the thing is trading ABOVE your price px)
I wouldn’t rule out a down close for NVDA today. That would be below $20.60 level.
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