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When the Chips Are Down

03/25/2008 12:00 am EST


John Buckingham

Editor, The Prudent Speculator

John Buckingham of Prudent Speculator Tech/Value Report says graphics chip maker Nvidia is a leader in a growing market, and is holding its own against the big boys.

We’ve watched shares in Nvidia (Nasdaq: NVDA) fall from grace over the past five months, and as a result we find it a fine moment to reintroduce readers to the stock and the value it represents.

Nvidia is a graphics chip maker, best known at the “discrete” end of the spectrum of the computing market, which includes chips for auxiliary graphics-specific cards that often are pur­chased separately for incorporation into a computing system. Nvidia also offers “integrated” graphics chips, which are modules that are tacked onto the computer’s motherboard to build in graphic display capabilities.

In the overall graphics processing unit (GPU) market, Nvidia scores a solid second place with 28.4% of the market, behind Intel’s 37.4% take and above the 23% percent foothold of Advanced Micro Devices, which purchased Nvidia’s rival ATI Technologies in the summer of 2006 to get into the market.

The market for graphics add-in boards, which utilize discrete chips, rebounded strong­ly through last year. The fact that Nvidia so clearly dominates this market, which represents the best of what all chips makers have to offer, is testament to the company’s growing tech lead over AMD.

Nvidia believes that the discrete GPU will continue to gain in importance, as gaming, video processing, and higher-quality display demands from computer users re­quire dedicated handling of graphics-related data. Nvidia has managed to stay [in] front in terms of graphics processing capabilities and market share.

Happily, Nvidia is provid­ing good reasons to upgrade with its latest offerings, so its share of growth is worthy of a more optimistic premium on the stock.

Further, there’s still a significant amount of share Nvidia can take in the overall market. More folks are catching TV shows online [and] playing PC games, too. And the games are more sophisticated. Microsoft’s Vista operating system requires far more graphics processing power, even in its basic mode. These growing demands offer Nvidia ample opportunities to expand its already substantial presence in the integrated market.

Finally, markets outside the PC are on the radar, as Nvidia challenges folks like Texas Instruments in wireless phone display technology and Trident Microsystems in flat panel displays. For Nvidia, the extensions—both of brand and of technology—should ease the influence of the PC on [its] op­erating results.

With the stock now sitting just above the level we first purchased it back in July 2006 (it closed around $20 Monday—Editor), though at a compara­tively tame forward price/earnings multiple (12x, versus 17x), Nvidia currently is among our very favorite tech names.

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