NVIDIA (NVDA) is a specialized semiconductor manufacturer best known for its graphics chips for gaming computers. Their products compete with chips from Intel (INTC), Qualcomm (QCOM), Advanced Micro Devices (AMD), and Marvell Technology Group (MRVL). There is a very large short position of about 8% of NVIDIA’s market cap. The shorts are betting on NVDA losing business to Intel’s integrated chips, which include video processors and NVDA’s lagging in the mobile chip space, but the shorts were squeezed on Friday as the company reported better than expected earnings Thursday after the close, finishing at 19 up 8.8% on the day.
The company reported 2nd quarter earnings that beat Wall Street estimates by 50%. Earnings were $0.30 per share vs. analyst estimates of $0.20. The company gave positive revenue guidance for the October quarter as well which was particularly important as 2nd quarter revenue just met analyst’s estimates.
This rosier outlook caused Needham and Co. to upgrade NVDA to buy from neutral with a price target of $23 based on their 2014 earnings estimate of $1.25 per share. Needham analyst Rajvindra Gill sited NVIDIA’s success in broadening their penetration in cloud computing and automobile markets, thus lessening their dependency on the highly competitive graphic chips for gaming market.
NVDIA’s Tegra mobile processing chip is now an integrated chip and has a large $2 billion pipeline in the automotive industry. A number of brokerage firms, including Raymond James, reiterated their buy recommendations on the stock as well.
NVIDIA management has done an excellent job of diversifying into less commoditized markets such as data centers, cloud computing, automotive and mobile where their graphics chips have strong, growing appeal. NVDA’s revenue from automobiles and mobile devices rose 200% to $159 million in the 2nd quarter.
The company has $4.6 billion in cash and cash equivalents on its balance sheet which is equal to about $8 per share and throws off about $600 million a year in free cash flow. With the stock at $19, the company has the capacity to buyback a significant number of shares. In the most recent fiscal year they bought back 62 million shares for $887 million.
NVDA has a bullish Chaikin Power Gauge rating and is just coming off an oversold buy signal in Chaikin Analytics. The stock needs to breakout above 19.50 in order to establish a strong upward price trend. With technology stocks one of the strongest sectors in the stock market, NVIDIA’s earnings report will likely attract additional attention from institutional investors as Wall Street analysts raise their estimates based on Thursday’s earnings beat and the prospect of a better revenue outlook for the 3rd quarter. With PC sales bottoming out in June, the revenue from their core gaming and PC business will be shored up as their entrance into new markets adds some pizazz to their earnings picture.
NVIDIA has a Very Bullish Chaikin Power Gauge rating that is driven by Bullish Financial Metrics and Very Bullish Expert Opinions which reflect increasingly bullish analyst’s opinions, upward earnings estimate revisions and positive industry group strength. Insiders have been net buyers of NVDA stock while the large short position will create plenty of potential demand for the stock if it breaks out to new highs above 19.73.
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NASDAQ Chaikin Power Indexes based on the Chaikin Power Gauge Rating