NVIDIA Corp. (NASDAQ: NVDA) reported earnings above estimates, and shares are recovering.  The graphics chip-maker said its net earnings were $61.7 million, or $0.11 EPS.  On a non-GAAP basis its earnings were $0.20 EPS.  Its revenue was $897.7 million.  First Call had estimates pegged at $0.12 non-GAAP EPS and $890 million in revenue.  While earnings were above estimates, they are down a whopping 74% from the $235.7 million and $0.38 EPS and represents a 20% drop in revenues from year ago levels.

What is interesting is that the company said operating margin wouldcome in flat at 41% and said that strength in the holiday season is notlikely.  It also expects that revenue will fall by about
5% in the current quarter.  This would put revenues aroundthe $850 million mark, and that is well under the near-$910 millionexpected from analysts.

The company is also calling for itself to recover from the AdvancedMicro Devices (NYSE: AMD) pressure it has faced since it had the chiparchitecture problems.  Both AMD and NVIDIA are cutting jobs.  NVIDIAis lucky because it essentially only competes against AMD, but AMD is asplit company which competes with NVIDIA on the graphics front andcompetes with Intel (NASDAQ: INTC) on the processor front.  Both NVIDIAand AMD are in the onset of a PC market downturn and a consumer nowonly focusing on "the cheapest computing for the money." 

Shares closed down 10% at $7.62 today, yet shares gained 12% to $8.55in after-hours trading.  After Cisco’s awful notes last night and afterthe poor results were are seeing elsewhere, Wall Street already knewthe guidance was toast.  Now traders are looking at valuations. 

If NVIDIA stock falls much more it will start to compress into the"under 1.0-times revenues" category, it it can regain some lost groundfrom that last SNAFU on its graphics cards. That is still much richerthan AMD, but far cheaper than Intel. The company is also awash inliquidity with no real long-term debt.  We would caution that despitethe market drop of the last two-days that the stock after the gainstonight is already up 43% from its recent market meltdown lows.NVIDIA’s shares have fallen more than 75% over the last year from thehighs.

Based upon the new guidance being so much lower than estimates and under most analyst targets, we won’t at all be surprised if we see analysts throw in the towel even further tomorrow.  But the recent downgrades have all been to ratings which were already negative, with an average target is $14.00.  You can read the reports tomorrow, but any fresh downgrades tomorrow will be about as helpful as asking you who you were rooting for in the World Series or the election.  Good for trivia, but does nothing for you or anyone else.

We do not expect any major recovery in the immediate future.  Weexpect valuations to remain under pressure more than being snapped upleft and right.  We expect a weak economy to only get worse and wethink that will last for quite some time.  If you have been reading ourstance on most sectors, we expect the consumer and business spendingmarkets to be weak in computing and technology for some time.  But atsome point value has to prevail.  For those with vision and not lookingfor just the next hour to day to week, we think the valuations arestarting to look compelling on a "less terrible than we were bracedfor" basis.

Jon C. Ogg
November 6, 2008

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