Nvidia Looks Evenly Poised

Santa Clara, California-based Nvidia Corp. (NVDA) offers digital media processors and related software for a wide range of visual computing platforms.

Things are going well for the company and it recently launched some new products like 12 new high-definition mobile Internet devices (MIDs) powered by the NVIDIA Tegra processor and new servers powered by NVIDIA Tesla(TM) GPUs. These new product offerings will have a positive impact on its revenue stream going forward.

Nvidia has a strong position in the gaming segment of the market for high-end graphics. Its GeForce line of graphics cards is essential for playing some of today’s most popular computer games, and in this segment Nvidia has become a very familiar name. Although gaming is key to Nvidia’s market, computing is becoming increasingly more visual according to the company, and we believe this is correct.

Although Intel (INTC) is aggressively competing with Nvidia to take a share of the gaming card market, we do not expect Intel to catch up anytime in the foreseeable future given the large gap. We expect Nvidia to maintain its advantage in the gaming market.

Nvidia’s strategy is to focus on delivering value to people that care about graphics rather than chase the entire market. Although this could hinder revenue growth over time as its market segment gets restricted, it should allow the company to maintain strong margins.

We expect increased demand for its chipsets with important customer wins in the future. Moreover, we are encouraged by the ramp-up of its 55nm processes and the forthcoming 40nm technology, which are expected to improve margins and help the company to gain market shares beyond 2010.

We are encouraged by the company’s cost-cutting efforts and ongoing depletion of channel inventory. Thus, we remain positive about the company’s long-term growth. Nvidia reported better-than-expected result for the 1Q of 2009 and issued modest growth outlook for 2Q. We expect the company to report a non-GAAP loss for fiscal 2010, impacted by a weak desktop PC market.

We believe that although volume was not bad, the company is running into an increasingly difficult pricing environment given the weakening consumer market. Thus, we maintain a Hold rating on Nvidia shares.

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