BUY OR SELL-Can Nvidia power through fading product line?
* Bears see old products ending, slow growth in new markets
* Bulls expect growth of core business and new product hits
By Ian Sherr
SAN FRANCISCO, Dec 4 (Reuters) - Graphics microchip maker Nvidia Corp (NVDA.O) is a company in transition.
The Santa Clara-based company halted development for one of its largest units in October, raising questions about whether the unit's product sales would slowly tail off or sales would drop off a cliff.
And, if they did, could the company's products in new market segments gain enough traction to make up the difference?
A FUTURE UNCERTAIN
"People are hoping for too much from the company, and aren't incorporating enough risk into the view of the company's future," said FTN Capital Markets analyst Joanne Feeney, who is one of three analysts with "sell" or "underperform" ratings on the stock, according to Thomson Reuters I/B/E/S. Sixteen say to hold.
Shares are closing at nearly 18 times consensus earnings estimates for 2011, she said, which is at the very high end of its historical range, excluding bubble years.
Feeney, who does not hold any shares of the stock, also said there was considerable uncertainty around Nvidia's new products for supercomputing and mobile devices.
Executives told analysts earlier in the year they expect Nvidia's "Tegra" mobile device products to pull in at least $200 million in revenues next year, with a run-rate of $125 million in next year's fourth quarter. Additionally, Chief Executive Jen-Hsun Huang told Reuters in October that the company's "Tesla" supercomputing chips were netting $10 million.[ID:nN30244611]
But, Feeney said, that is all stacked against what she calls the "forthcoming demise" of Nvidia's chipset business due to a legal dispute with Intel Corp (INTC.O).[ID:nN13201671]
Chipsets are collections of chips on a board that connect a microprocessing brain to other parts of a computer.
As a result, Feeney expects profits next year to be roughly half the Wall Street consensus forecast. On average, Wall Street analysts are expecting Nvidia to earn 73 cents per share for fiscal 2011, according to Thomson Reuters I/B/E/S. Feeney expects 42 cents.
As Intel begins to integrate the central microprocessor, or computer's brain, with lower-performance basic, or integrated, graphics chips in the near future, Nvidia's products will likely suffer, she said.
Unless the graphics maker is able to resolve its disputes with Intel, its chipset business could fade in a little more than a year.
And, she expects the company to lose share on its core consumer graphics card business as well, which could only add to lost business from the higher-margin professional chips, which saw a drop due to recessionary spending freezes.
"Their only hope is that workstation comes back and Tesla does well," she said.
BETTER THAN YOU WOULD EXPECT
Needham & Co analyst Rajvindra Gill takes a different view of Nvidia's chipset business.
While he still sees a decline similar to other analysts, he believes that it will happen slowly, over a couple of years, and that the product's likely demise has already been factored into the stock price.
And, he adds, Nvidia has a strong customer in Apple Inc, which is not likely to use Intel's basic integrated graphics.
"There are no signs Apple is moving to Intel's integrated graphics," Gill said, adding that Apple's (AAPL.O) computers represent 51 percent of Nvidia's chipset business.
Gill, who does not own Nvidia stock, expects Apple's portion of the graphics company's chipset sales to grow 6 percent to 8 percent annually in the next year, thanks to the iPod maker's laptop sales.
He added that while Nvidia's non-Apple business will likely decline some 15 percent over the same period, it won't be dramatic.
"I don't think a third of their revenue is going to fall off a cliff -- that's a completely unrealistic knee-jerk reaction," Gill said.
He is one of eight analysts with a "buy" or "strong buy" rating on the stock, according to Thomson Reuters I/B/E/S,
Gill also said that demand for Nvidia's main product -- graphics chips for editing video, playing games, and other high performance computing tasks -- will increase in 2010 because of the needs of Microsoft Corp's (MSFT.O) Windows 7 and Apple OS X "Snow Leopard" operating systems.
And, he said, Nvidia also stands to benefit when shoppers start buying more notebooks again, instead of netbooks, as prices of better components fall.
Nvidia shares rose 2.5 percent to $14.18 -- down 14.5 percent from their 12-month high of $16.58 -- on the Nasdaq. (Editing by Gerald E. McCormick) ((email@example.com; +1 415.677.2542; Reuters Messaging: firstname.lastname@example.org)) ((See blogs.reuters.com/mediafile/ for Media and Technology -- Reuters' media and technology blog))
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