Semiconductors . . . Nvidia guided sequential revenues higher despite street expectations of a soft 4th quarter. Gross margin guidance is being viewed favorably by the market. While Bear Stearns believes the positive gross margin guidance will carry the name higher this morning, firm advises investors not to chase the stock at these levels. Instead, would wait to see if company's market share stabilizes and a lower stock price before turning more positive, noting that its strategic concerns regarding company's product portfolio still linger. Merrill Lynch is removing its Sell rating on the stock and moving to Neutral, as quarter indicates that the worst is seemingly behind the company.
Pacific Growth Equities analyst Brian Alger reiterated his "equal weight" rating on Nvidia, saying that he does not think the stock is particularly expensive, given that it has been largely ignored in the recent run up in the chip sector. "We believe that pent-up demand and short-covering may lead to a near-term rise in Nvidia's price, but we question its sustainability," Alger said.
SanDisk was selected to join Nasdaq-100, effective at the beginning of trading Thursday, Nov 13. SanDisk will also be included in the NASDAQ-100 Index Tracking (QQQ). Stock is replacing Biogen, which is scheduled to merge with Idec Pharma. Idec will then change its name and symbol to Biogen Idec and BIIB, respectively
AMD downgraded at Oppenheimer to Neutral from Buy, saying uncertainty regarding AMD's plans for a 300mm advanced wafer facility has caused them to take a more cautious near-term view; until more details on AMD's 300mm plans emerge. The firm believes concerns regarding funding and the potential income statement impact will weigh on the shares.
Integrated Silicon downgraded at B. Riley to Neutral from Buy based on valuation, as the stock has exceeded their $17.05 target.
NVIDIA reported fiscal revenues of $486.1 million (up 5.7% Quarter over Quarter), within the 5-6% guidance the company indicated in August, and in line with consensus estimate of $486.7 million. Estimate was slightly higher at $496.5 million (up 8.0% Quarter over Quarter). GAAP EPS came in at $0.04 vs. our and consensus estimates of $0.12. However, excluding two one-time charges and related tax effects, the EPS for the quarter was $0.11, a penny below expectations. Gross margin declined by 0.7% to 27.6%, in line with our expectation of a 0.8% decline. Core business revenues (i.e. excluding Xbox and MediaQ) declined 3.6% Quarter over Quarter to $360 million, while Xbox revenues increased 42% to $122 million.
NVIDIA.s guidance for a 1%-plus increase in gross margin in fiscal 4th quarter 2004 alleviates one of the concerns we have had with the stock. Though expected NVIDIA’s margins to recover in the April quarter, guidance would indicate that the improvement is occurring about a quarter earlier than anticipated. Continue to expect NVIDIA’s gross margin to continue to improve through FY05 as progress is made on 0.13-micron cost reduction, led by enhancements in each successive new product, and by an increase in production at IBM, which is helping lower production costs relative to production at TSMC. The company cited the ramps of NV36 at IBM (which replaces the NV31 manufactured by TSMC) and nForce3 as reasons for the margin improvement in the January quarter, as margins on these products are higher than the current corporate average.
NVIDIA’s product portfolio is not well positioned in light of the ongoing dynamics in the PC graphics market, i.e. the shift from desktops to notebooks, and from discrete to integrated graphics, which we expect will continue in the next couple of quarters limiting NVIDIA’s unit growth. In 3rd quarter 2003, notebook graphics represented only 8% of NVIDIA’s PC graphics units, and integrated represented 11% of units, lower than the industry averages of 18% and 55% respectively. Secondly, we have not seen any evidence of a stabilization in NVIDIA’s discrete graphics market share. As we have previously indicated, on the desktop discrete side, the performance leadership in high-end graphics appears to remain in ATI’s hands with its Radeon 9800 XT, which could put continued pressure on NVIDIA as the high-end products waterfall to the mainstream segment after about a quarter.
NVIDIA guided for flat revenues in the January quarter, expecting Xbox revenues to decline by $80 million, and core business revenues to increase by a similar dollar amount. This implies a significant 22% sequential growth in core business revenues, which the company suggested is being driven by strong acceptance of its products as it exited the quarter. However, we would note that the strength is probably also due to the impact of its new product introductions (NV36 and NV38) at the end of the October quarter, which could have led to some purchase delays from 3rd quarter to 4th quarter. This is supported by the fact that revenues in the core business declined 3.6% Quarter over Quarter in the October-Quarter, in what is a seasonally strong quarter for the PC market. Also, we have yet to see strong sell through of NVIDIA’s new products.
Analysts are raising 2005 EPS estimate from $0.71 to $0.81. The change is due to several factors: (1) The increase in net non-operating income following the redemption of the $300 million convertible debentures leads to a $0.04 increase in EPS, as all of NVIDIA.s net interest expense is eliminated, (2) An increase in our gross margin assumption for the year from 30.4% to 31.4%, which leads to $0.10 increase in EPS, (3) These two increases are partially offset by higher operating expenses which we raised due to our expectation of higher R&D expenses next year.
Advanced Micro held an upbeat analyst day yesterday. No financial update on the fourth quarter was provided, though the CEO noted that he expects the company to be profitable this quarter, in line with our expectations: analysts are estimating EPS of $0.08 for 4th quarter 2003. Management noted that its OEM customers are anticipating a resurgence in corporate PC demand in 1st half 2004, in line with analyst thoughts. On the microprocessor side, AMD displayed its product roadmaps for the next two years. In 1st half 2004 it plans to launch two new Athlon 64 products: a mainstream desktop version code-named Newcastle, and a lower-power version for notebooks. AMD highlighted the server and notebook segments as its growth opportunities, and plans to place more emphasis on these segments in terms of R&D and marketing. With regards to 90nm and 300mm technologies, the company has pushed out its production schedule for 90nm by a few months and now expects 90nm products in 2nd half 2004 instead of 1st half 2004. With regards to 300mm, the company said it has selected a site for a fab, and further details could be announced soon. Its current product roadmap calls for 300mm production using 65nm process in 2005 or 2006. On the flash side, management highlighted the cost benefits of MirrorBit flash technology, which combines the high performance of NOR flash and the low cost of NAND flash. AMD plans to target current NAND applications with MirrorBit flash in the future. Though the cost per bit is approximately 50% higher than NAND today, AMD is forecasting the cost to decline to parity with NAND flash in 4th quarter 2004. Though AMD is benefiting from the near-term strength in flash memory as a result of strong handset builds, continue to rate the stock Peer Perform as we believe it will be difficult for AMD to gain share in microprocessors in the near-term. Moreover, on the flash side, pressures from Intel's aggressive pricing and Samsung's steep NOR flash ramp could impact the NOR market in 1Q04.
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