New Trade NVDA: Report FQ4 Feb 15th, Our Preview

by Dan February 15, 2012 3:07 pm • Commentary

NEW TRADE Feb 15th, 2012:  See our preview below, but if you wanted to make a bullish bet, Feb upside call spreads are dollar cheap……Heck the stock was trading at $16.90 this morning…..As I said the other day, they already pre-announced the quarter and way the stock trades on the way out will have a ton to do with guidance….

If You wanted to take a shot that guidance better than expected and the stock rallies back to resistance, the Feb 17/18 Call Spread (stock ref $16.20) looks cheap offered at .17.  Risk .17 to make .83 if stock has a monster rally back to support…..

Another name that got me thinking today about this was JNPR was up 11% this morning on some positive cap ex chatter out of telco carriers….but JNPR has also been a tech laggard and in this giddy market investors are looking for beta catch up plays….any good news and NVDA could fall into this category….

I did not put this on, but if stock gets hit on the bell I may.


Original Post Feb 13th, 2012:

NVDA ($16.15)


-company reports their fiscal Q4 after the close on Wednesday, the options market it implying about a 6.5% move (the Feb 16 straddle is offered at about 1.10, which is what you need on either side of $16 to break-even on Friday’s expiration).

-On January 25th, the company pre-announced lower than expected sales due to supply constraints resulting from the floods in Thailand last year.


-Wall Street analysts are fairly mixed on the name with 14 Buys, 18 Holds and 2 Sells, with an average 12 month price target of about $16.26

-Short interest only sits at about 3% of shares outstanding.  


-NVDA trades at about 14x fiscal 2013 earnings estimates, but the company has about 28% of their market cap in cash and no debt, so excluding cash the stock trades at a little less than 12x which is by no means and onerous valuation for a semi company, basically inline with BRCM‘s valuation ex-cash, with not too different of growth profile (both expected to have single digit sales growth in the coming year).


-The stock is up about 17% ytd, but still down about 28% from the 52 week highs made last year, which is slightly outpacing the ~15.5% gain in the SOX ytd, but shy of BRCM’s ~25% gain.

-Technically the chart looks fairly interesting as it appears to be about to break-out of a textbook head and shoulders bottom formation, with neckline situated at the current price of about $16.00

[caption id="attachment_8814" align="aligncenter" width="300" caption="1 Yr NVDA chart from Bloomberg LP"][/caption]



-As noted above, the Jan 25th pre-announcement is obviously “baked into the cake” as the stock is now ~12% than where it was on that date.  The focus will be on forward guidance.  Here are a couple previews of the upcoming call:

UBS analyst who is Neutral on the stock and 12 month target that is below where the stock is trading had the following preview in a note to clients today:

Update to F2013 guidance is a likely key catalyst on the earnings call
We believe NVIDIA may lower its F13 sales guidance of $4.7-5.0bn, especially as: 1) persistent HDD shortages could challenge its GPU business, 2) Tegra 3 success will be highly dependent on the success of its customers, a dynamic that is difficult to predict, especially in tablets. We also believe EPS upside could be limited by opex ($1.54-1.61bn F13 guidance) to support its ambitious development schedule.

Potential F1Q13 guidance downside risk on tablet weakness/HDD shortage For NVIDIA’s F4Q results (15-Feb), we expect sales/EPS of $950m/$0.19, in line with consensus. For F1Q, we expect sales/EPS of $938.4m/$0.19 vs consensus of $949.2m/$0.18 with gross margin of 53.7%, as we expect a richer mix. However, we see downside risk to estimates as the impact of the Tegra 2-to-3 transition and HDD shortages could persist.

Barclays Capital who has an Equal Weight rating on the stock had the following preview today:

We Look for Inline Print (with Revised Guide), Slightly Lower Guide
We expect NVIDIA to report January quarter results in-line with the company’s revised guidance of $940-960M with weakness driven by HDD shortages impacting discrete GPU sales and lower Tegra ahead of product transition partially offset by higher gaming revenue – we model revenue/EPS of $950M/$0.17 (consensus $950M/$0.19).

Specially, in GPU we model a double-digit decline in units – we expect HDD impact both in terms of lower PC shipments and lower GPU attach rate given recent rise in price for disk drives. Layer in NVDA’s larger exposure to the channel business and we model overall GPU sales lower by 17% Q/Q to $536M – this compares to AMD’s GPU sales which declined 5 % Q/Q in 4Q11.

We model GM lower by 120 bps to 51% and Opex slightly higher to $362M driven by increased hiring and investments for new products. Add it all up and we model EPS of $0.17 (consensus $0.19).

Looking to the April quarter, with the near-term PC environment still fairly weak and our view that NVDA is likely to lose some share given rollout of its 28nm “Kepler” GPU is one quarter behind AMD and we look for NVDA to guide revenue lower by -2% Q/Q – we model revenue/EPS of $930M/$0.16 which is slightly below consensus of $949M/$0.18.

Key areas to focus on include:

– Outlook for GPU attach rates – here we balance improving HDD supply and round of design wins for Intel’s Ivy Bridge platform with increased demand for Ultrabooks which do not have a discrete GPU;

– FY13 outlook – will management continue to endorse prior guidance for FY13: $4.7-5.0B in revenue, 51-53% GAAP GM, GAAP opex of $1.54-1.61B, implied EPS of /~$1.25-1.45 (consensus $0.94)?


MY TAKE: After doing a little work on the name (will continue to look at over the next couple days prior to earnings) that there is a fair bit of skepticism built into the name at current levels.  Near term, NVDA has not benefited from their exposure to the hard disk drive makers and the supply constraints caused by the floods in Thailand last year.  At this point it appears that many analysts are already bracing for less than stellar Apr qyr guidance, and if not as bad as people think the stock could rally out of the print.

As many of you know I am not a fan of buying extended stocks, even when there appears to be valuation support or some sort of catalyst, but 17% gain in NVDA year to date, given its sound balance sheet, decent valuation, and the potential for a second half pick up in PC’s could set up for a decent buy at current levels.   Also if the rally is going to continue there is a strong chance that stocks like this will benefit from a broadening out of the rally…..stocks like AAPL, MSFT, IBM and INTC can’t do all of the heavy lifting, it will take greater participation.