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Strategies & Market Trends : Dave Gore's Trades That Make Sense -- Ignore unavailable to you. Want to Upgrade?

To: Dave Gore who wrote (10326)	7/31/2002 3:05:24 PM
From: Dave Gore	Respond to of 16631

Nvidia (NVDA) 11.29 -4.93: One sure way to displease... the investment community is to guide estimates higher, only to issue a material earnings warning several weeks later... Such actions create a lack of trust between management and shareholders/analysts that can take many months to heal... It is this breach of confidence which is responsible for the market's severe reaction to Nvidia's surprise warning... Company, which had remained optimistic in its last call, announced that a much weaker than expected PC market would result in sales of only $410-$430 mln vs. consensus estimate of $552 mln (range was $497-$590 mln)... Excess supply and shifts in product mix (toward lower end products) also contributed to the shortfall... NVDA plans to take a "significant" write-off of inventory in the quarter... Including this charge, company now expects results to be "at or above break-even." The street was looking for a gain of $0.40... As we noted in our ill-timed report on the stock yesterday, NVDA shares had tumbled by nearly 78% from their 52-wk highs amid growing concern over the sluggish PC market, pace of Xbox sales and increased competition... Clearly, the market had built in the possibility of bad news... However, the longer the company went without providing any cautionary comments/bearish guidance, the more investors began to look at the stock as a relative bargain - especially once the market tone began to improve... Should note that over the past few quarters - a very difficult period for the industry - NVDA never issued a warning... To the contrary, the company guided estimates higher in April and May of this year... Looking further back, company had met, or exceeded, consensus numbers in each of the last 13 quarters... Given its earnings history and the severe sell-off prior to last night's warning, it was easy to see why investors started to nibble on the assumption that additional downside risk was minimal... And had the warning been less severe (revenues 26% below estimates is a huge miss), the reaction wouldn't have been so ugly... But when you combine the scope of the miss with the emerging questions about management's veracity you get today's 30% drop in the stock price... An overreaction? Probably. Though many of us were shocked and angered by the announcement - Briefing.com obviously included in that group - if we step back and take emotion out of the equation, and just look at the numbers, the story isn't as bad as it first seems... At $410 mln, sales for the quarter will be down by nearly 30% sequentially (the ugly part) but up by 58% year-over-year... Assuming the company continues to see business slow, and that revenues fall by 10% sequentially in Q3 and Q4 - a pretty ugly and unlikely scenario given seasonal bias - NVDA would end the year with sales of about $1.7 bln... That's well below the $2.2 bln expected prior to last night, but still up 24% versus the prior year - and this during one of the ugliest years for tech companies... With the stock now at $11.27, the price/sales ratio using the $1.7 bln figure is 1.0x - a relatively low valuation for a industry leader with a strong product profile enjoying 24% top-line growth... Right now the problem is one of faith - investors have lost their faith in management... Most likely it will take a couple quarters of hitting numbers for company to win back investor confidence... During that period, NVDA could have a hard time doing any better than keeping pace with the market... Once macro-conditions improve, however, Briefing.com maintains that NVDA will be well positioned for strong growth and significant capital appreciation as they remain the dominant player in an attractive segment of the business. -Briefing.com