Nvidia keeps rolling

Microprocessor makers, memory chip manufacturers, network chip specialists and digital signal processor vendors have reeled in the face of the U.S. tech recession, but Nvidia hasn't flinched. This week's quarterly report underscored the fact that the 3D graphics king keeps winning the game--and that there's hardly anyone left to play with.

Nvidia reported better-than-expected earnings for the first quarter of fiscal 2002, but the more important news came during the conference call. In a sense, there wasn't any news at all, because company executives did little more than repeat the same forecast they made in February. Chief Financial Officer Christine Hoberg told analysts to stick with First Call estimates calling for 50 percent revenue growth in fiscal 2002 and a 40 percent sales improvement in 2003.

"What an execution machine," Prudential Securities analyst Hans Mosesmann wrote in a research note released Wednesday.

Any technology company able to stay with its original forecasts gets accolades these days. It's even more impressive coming from a chip company, especially one that until now has been entirely dependent on PCs, a mature market.

"Looking at the semiconductor space, there aren't too many other companies who can point to 50 percent growth in revenues this year and 40 percent next year," said Eric Ross, analyst with Thomas Weisel Partners. "I can't think of one besides Nvidia."

Doubt in spite of strength
Wall Street has rewarded believers. Since going public in early 1999, Nvidia's market value has risen almost tenfold.

Yet the company has never shaken its doubters. First Call, Zack's Investment Research and Nvidia's own Web site list only five Nvidia analysts--a quarter of the coterie that follows, for example, network chip specialist PMC-Sierra, even though that company likely will report annual revenue that's less than half of Nvidia's.

As recently as early April, more than a fifth of Nvidia's outstanding shares were being shorted, according to Market Guide. Short-sellers bet a stock price will fall; they borrow shares to sell them immediately and hope to cover the loan later by buying replacement stock at a lower cost.

"The shorts have gotten painfully squeezed on Nvidia," Ross said.

Squeezed? Try crushed like an egg on the seabed. Nvidia, already trading at an all-time high, rose as much as 7.6 percent Wednesday, while the rest of the Nasdaq retreated. Nvidia stock has more than tripled since one of the company's most notable rivals, 3dfx Interactive, surrendered in December and agreed to sell its assets to Nvidia.

3dfx's failure stands as an example of the industry trend that has so many people wondering about Nvidia.

"If you look at it historically, graphics companies have blown up every couple of quarters," Ross said. "They all were king of the hill for about 25 minutes, and then they got knocked off."

Wall Street prefers less volatile industries, but observers overlook the fact that the graphics industry has become a reasonably stable market, and largely because of Nvidia.

Mercury Research analyst Mike Feibus points out that Nvidia went public just as 3D graphics moved from a high-end niche into broader products used in virtually all desktop PCs. Nvidia saw that and introduced chip designs every six months, a breathtaking pace for an industry accustomed to seeing new products every year and a half.

In fact, Nvidia fires out chip architecture at the traditional pace, Feibus noted. But while other graphics chipset companies use one-size-fits-all approaches, Nvidia uses the same architecture to design chips for different segments.

The GeForce 2 line, to use one example, includes MX for cheapskates, GTS for the midrange and Ultra at the high end. And there are further subdivisions for these products.

Competitors few and far between
Nvidia's only remaining publicly traded competitor, ATI Technologies, lately has started doing the same thing with its Radeon chips, but Nvidia already built a clear lead.

Nvidia's share of the standalone graphics-processor market increased to 53 percent from 37 percent a year ago, according to Mercury numbers cited on this week's Nvidia conference call. In the latest generation of graphics processors, it claims an 83 percent share.

Call Nvidia the Intel of 3D graphics. Actually, Nvidia is in a better position because there's no AMD equivalent in 3D graphics; ATI is doing all it can to hang on. "There really isn't a company looking over Nvidia's shoulder," Feibus said.

At least in 3D graphics Wintel desktops. That's a mature market, and Nvidia's growth has come largely at the expense of competitors. The company's green fields include notebook PCs, workstations, and desktop PC chipsets that combine graphics with core functions. Nvidia just started selling cards for Apple computers, and it will get at least some boost when Microsoft starts selling the Xbox game console, which uses a Nvidia chipset.

These are new targets for the company, but after two and a half years of solid performance in a slowing market for PCs, Nvidia deserves some benefit of the doubt. And not all the new endeavors have to be winners for Nvidia to do well. Consensus analyst estimates currently exclude Xbox revenue, for the most part, and Apple is only a small market.

The only real question about Nvidia might be the stock price. You could reasonably wonder if a stock that has gained more than 200 percent in the last five months can rise much higher.

But stocks ought to be measured in a relative sense. At Wednesday afternoon's price of $96, Nvidia was trading at 55 times its estimated earnings for the current fiscal year. Chip bellwether Intel, which will be lucky to grow half as fast as Nvidia over the next two years, was valued at almost 52 times its projected earnings. Network chip powerhouse Broadcom was trading at more than 100 times next year's predicted earnings.

Against that backdrop, Nvidia's price doesn't look outrageous. Perhaps the market as a whole has risen too far, too fast, as Thomas Weisel's Ross believes. But that's not Nvidia's fault. It's still in better shape than most chip companies.