NVDA:
June 15, 2000
Nvidia Shines Bright
By Monica Rivituso
TRADITIONALLY, KEEPING TABS on the graphics-chip industry has been a lot like watching a fireworks display. There's an intense burst of color and light, and then it fizzles out. Another explosion of sparkle quickly follows, only to fade away. And that's the way graphics chip companies seem to rise and fall.
So, when a company in this cutthroat industry continues to shine bright, it tends to garner some attention. These days, Nvidia (NVDA) is doing just that. The chip maker, which has been a favorite among the Wall Street crowd for some time now and a leader in its industry, is set to unveil its new chip, the GeForce2 MX, at PC Expo later this month. This latest graphics processor promises to give Nvidia a foothold in several new markets, and analysts are saying this could be the next big thing for the company.
"This is going to be a significant expansion opportunity for Nvidia as they continue to gain market share and enter new markets," says Prudential Securities analyst Hans Mosesmann.
Nvidia is best known as a graphics-chip maker for consumer PCs. But lately, the company has been reaching for new business. In March, Nvidia was tapped by Microsoft (MSFT) to manufacture the graphics chips that will be used in the software maker's new game console, dubbed the Xbox. The machine, which is slated to debut in the fall of next year, will go head to head with Sony's (SNE) much-anticipated PlayStation2. If the Xbox wins, Nvidia will take its first steps into the lucrative gaming market — a move the company hopes will open doors to the entire consumer-electronics market.
The company's latest chip offering, the GeForce2 MX, is part of Nvidia's expansion plans. The new chip should give Nvidia entrée into laptops and commercial PCs, as well as Apple's (AAPL) niche. Basically, the company has taken the core of its successful high-end chip, the GeForce 256, and tweaked it for these new applications. If this sounds familiar, it's because Nvidia is taking a page out of Intel's playbook: create a successful high-end chip and then alter it for other markets and attack all price points.
From the sounds of it, Nvidia's newest chip could end up being a serious threat to the competition. And it could sell just as well as, or even better than, the company's highest-volume chip, the TNT2 (its mainstream chip for PCs), according to Prudential's Mosesmann. To get an idea of the opportunity here, consider laptops. Two players have been the dominant graphics-chip suppliers here: ATI Technologies (ATYT) and NeoMagic (NMGC). But these days, NeoMagic has pretty much abandoned the market to focus on multimedia communications. Mosesmann notes that Nvidia has a good chance to swoop in and gain market share.
This kind of diversification in Nvidia's business could bolster its overall market presence. Morgan Stanley Dean Witter pegs the company's share of the graphics-chip market at 20-25%, but expects that could soon mushroom to 40% based in part on its new products.
Nvidia's current leader: the GeForce 2 GTS
And while the company is growing, the graphics-chip market is changing. This is an industry where leaders have tended to flame out fast, with leading companies quickly knocked off their pedestals by flashier technologies. These days, however, the technological expertise necessary to succeed in this market has intensified. That's why industry experts say only a handful of companies will end up dominating the market in the future.
Analysts and industry watchers expect Nvidia to be one of the companies left standing in this shakeout. In fact, Morgan Stanley says the chip maker "could reach market share levels that previously were unattainable by the former leaders in the market."
That said, Nvidia shares have already priced in a good deal of the enthusiasm about the company. When we last wrote about Nvidia on March 15, the Xbox win had just been announced and the stock had just come off a one-week 155% run. While the stock currently sits about 18% off the $150 high it hit back in March, it's still up 170% year-to-date. Not too shabby. But even with that massive stock appreciation, Wall Street expects the stock to rise more. Prudential has a 12-month $180 price target, while Morgan Stanley has a $200 target.
Still, this skyrocket of a run up may prompt investors to question whether Nvidia is getting too pricey. The stock is trading at a price-to-growth, or PEG, ratio of 2.07, according to Zacks Research. Not the most outrageous multiple, but also not the cheapest in the group. Consider that Nvidia's biggest competitor, ATI, is trading at a PEG of 1.25. It should be noted, however, that ATI has had some troubles lately. Last month, the company said earnings would come in below expectations, largely due to component shortages and a product transition.
But the stock's high price hasn't scared analysts yet. They describe Nvidia's execution as flawless and continue to rate the company a top pick. "The company is an execution machine and clearly the premier 3-D graphics company in the world," says Prudential's Mosesmann.
Against this backdrop, Nvidia will trot out its latest chip at PC Expo, just about the biggest PC dazzle-fest around. Fittingly, the unveiling will take place at Chelsea Piers on Manhattan's Hudson riverfront. Not a bad spot for a fireworks display. |
