Brokerages cut Nvidia's profit view after weak forecast

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By Manikandan Raman | July 30, 2010 1:47 AM EST

Atleast two brokerages cut their earnings estimate on Nvidia Corp (NVDA), a day after the graphics chip maker chopped its second-quarter sales forecast due to weakness in Europe and Asia and a shift in demand towards lower-end chips.

The company on Wednesday afternoon slashed its second-quarter revenue outlook to $800 million to $820 million from a previous forecast of $950 million to $970 million.

ThinkEquity lowered its second quarter profit and revenue view to $0.10 a share and $810.3 million, respectively from $0.21 and $965.3 million.

Wall Street analysts are expecting earnings of 20 cents a share on revenue of $955.03 million for the second quarter.

Assuming slower growth in discrete PC graphics offset somewhat by better growth in professional solutions and consumer smartphone/web tablet platforms, ThinkEquity also cut its fiscal 2011 earnings outlook 64 cents a share from 95 cents a share.

The brokerage, however, believes that NVIDIA will likely become more competitive against AMD/ATI in the high-end discrete desktop and notebook graphics market.

"While AMD/ATI is pricing more aggressively for the same raw graphics performance, we believe that Nvidia's entrenched software advantages, better parallel/visual computing capabilities, and mindshare with game developers and high-end gamers gives it an advantage in retaining the high-end graphics market," analyst Krishna Shankar of ThinkEquity said in a note to clients.

Shankar said NVDA has significant potential opportunities for gross margin expansion to 54-55% range over the next 24 months from current levels in the 45-48% range, citing continued manufacturing efficiencies at Taiwan Semiconductor Manufacturing and a richer product mix involving high-end PC and workstation graphics, professional solutions, and the Tegra 2 mobile platform business.

Shankar, who maintains "Buy" rating on the stock, said he believes that the Ion chipset for Intel Atom-based netbooks, Web tablets, smartphones, and consumer infotainment devices will likely be a steady growth opportunity.

"Nvidia also will likely see accelerating revenues from its second-generation Tegra 2 system-on-chip (SoC) solution for smartphones, Web tablets, netbooks, and mobile Internet/entertainment devices," analyst Shankar said.

The analyst estimates that the Tegra SoC business may approach $100 million in quarterly revenues by middle of 2011 and offset declines in the Intel and AMD chipset business for NVIDIA.

However, analyst Daniel Berenbau of Auriga USA has different views and said NVDA has stemmed, but not reversed, market share loss in Graphics Processing Unit (GPU) to AMD and the company's GPU market share woes will continue for another year.

"Fermi (NVDA's new product architecture) is helping on the high-end with enthusiasts but this success has evidently not trickled down to the mainstream," analyst Berenbau said.

The analyst cut his fiscal 2011 revenue and profit outlook to $3.5 billion and 57 cents a share, respectively from $4.0 billion and $1.00 a share.

Wall Street is expecting the company to earn 94 cents a share on revenue of $4.02 billion for fiscal 2011.

Berenbau , who maintains his "Hold" rating on the stock, also lowered  his price target to $10 from $14.

Shares of Nvidia closed at $10.13 Wednesday on Nasdaq.

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