NVDA's Downgrade by Evercore Partners (09/04/12)

Shares of NVIDIA Corporation fell  5.38% after Evercore Partners Inc. downgraded the maker of graphics processors to underweight from equal-weight and lowering PT to 13$, saying 2013 will be “challenging” for the company.  According to Evercore Partners, Apple’s launch of the IPad mini and new IPad might be a serious threat to Tegra-based tablets. In addition to that, the upcoming  Nexus 10 might switch from using Nvidia’s Tegra 3 chip to Samsung Electronics Co.’s Exynos 5. This might lead to inventory buildup in the next few months.

 However, there are few important things that have to be mentioned in regards to Evercore’s research. Nvidia is just starting to ramp production for its Chinese smartphone design wins. While growth has slowed dramatically in China, this is still a very large market, and one where Wall Street tends to have limited visibility (especially outside of the major coastal metropolises). With Tegra designed into 13 phones priced at $300 or less sales volume in China will likely outweigh more visible disappointments. Besides that, IPad Mini threat might be overstated, since it will be hard for Apple to match competitors’ prices; anything lower than $249 for the tablet will hurt Apple’s margins.  On the last conference call NVIDIA’s CEO made a point that Android tablets will be sold primarily to Android phone users.  Perhaps some Android phone users will pay a premium for the iPad Mini over an Android tablet, but the majority will stay within the Android ecosystem, for reasons of convenience. Also, Nvidia won the MacBook Pro GPU slot back from AMD this year, with the help of its new "Kepler" line of GPUs. Indeed, the introduction of Kepler is helping Nvidia gain market share from AMD across PC manufacturers. Nvidia's Q2 results indicate that share gains outweigh weak PC sales thus far, and can provide earnings upside even in a soft market.

 In order to reassess our position in NVIDIA we will focus in the next couple of days in updating our valuation and also perform supply chain analysis for NVIDIA and its customers.