High-Flying Nvidia

September 6, 2006

Shares of Nvidia have rocketed higher ahead of Microsoft’s release of the Vista operating system. Is its hefty valuation deserved? What will be the impact of AMD’s acquisition of competitor ATI Technology?

Shares of Nvidia (NVDA) have rocketed higher over the past two months following AMD’s (AMD) announcement that it will acquire Nvidia rival ATI Technology (ATYT). The $5.4 billion deal was announced on July 24th, and represented a 24% premium to ATI’s value at the time. Since then, Nvidia has climbed on optimism of improving market conditions and the possibility of a similar takeover.

Nvidia is a manufacturer of high end graphics chips used in personal computers, game consoles, and mobile phones. These are high growth businesses that are augmented by huge profit margins. The company’s GeForce series is considered the best graphics card available by avid gamers, helping drive repeat customers to its upgraded products.

The AMD-ATI tie-up may not be a boon for Nvidia at all – almost 20% of the company’s revenue comes from business with AMD. AMD will now turn to ATI for more cost effective solutions to boost its own profits. Nvidia will be able to shrug this off with its dominant position in the industry.

AMD’s acquisition is putting pressure on Intel (INTC), as Intel continues to cede market share in its main semiconductor businesses. Rumors of Intel using part of its $7 billion cash hoard to acquire a company like Nvidia or Broadcom (BRCM) have surfaced, but remain unlikely. Intel will probably continue its tradition of snapping up small private companies sporting unique proprietary technologies.

Nvidia stock has experienced a rollercoaster ride over the past year – doubling from $15 a share a year ago to over $31 in May, only to fall back to under $18 in July, then march higher to $27 today. The current run is not unwarranted since Nvidia is a fundamentally strong company benefiting from a booming business. However, the scale of the rise leaves little room for additional upward movement. The ATI acquisition has now been fully priced in, and Nvidia has become fully valued. Nvidia is also facing potential trouble from its investigation of stock option backdating.

Over the short-term, Nvidia will struggle as investors take profits from the recent rise. After the profit-taking subsides, Nvidia shares will shine once again as Microsoft’s release of the Vista operating system (expected January 30, 2007) drives additional demand for its products. Remain cautious of Nvidia stock over the next few months, but don’t be surprised if history repeats itself and the stock shoots higher again.



At the time of publication, Dhinesh Ganapathiappan did not own or control shares of any companies mentioned in this article.