Chipping Away At Nvidia

By Ryan Barnes | August 21, 2008 AAA

Graphics-chip-maker Nvidia Corporation (Nasdaq:NVDA) proved the severity of its recent profit warning by releasing poor results for the fiscal second quarter. Investors had effectively priced NVDA shares for the worst, sending them down 30% on the day of the warning then another 15% before bottoming out at $10.50 in early August.

Stock investors are always forced to divide their time between examining the trees (current earnings results) while not losing sight of the forest (long term thesis, secular trends, competitive advantages). Today we'll review both for the company, named last year's Forbes' Company of the Year, which now may be trading at bargain bin prices.

Into the Trees - Earnings Report Rundown
I stock buyback program by a billion dollars, making the program now big enough to retire about 20% of the outstanding shares at current prices. (To learn more, read A Breakdown Of Stock Buybacks, and learn what these company programs achieve and what it means for stockholders like you.)

And despite all the troubles, the company was still operating cash flow positive for the quarter at $90 million.

The best news is that shares appear to be oversold, and have been bid up a healthy 25% since the bottom in early August. The company is still expected to earn 90 cents per share for the current fiscal year, putting the valuation at an attractive 15-times estimates.

More clarity on future growth could come out next week when Nvidia holds an annual love-fest for analysts, developers and clients. A big topic of discussion will be the company's new Tegra product line of mobile "system-on-a-chip" processors that target the exploding smart phone/handheld device market.

Parting Thoughts
At these levels, Nvidia could be a great pickup for longer-term investors. While I'm still not delighted about the state of the U.S. consumer, Nvidia has broad international exposure (over 75% of revenues come from overseas) and is still best-in-breed in its largest market segments. Net income has risen over eight times in just the past four years, while the stock price has barely doubled.

I see graphics capabilities as one the most important drivers of consumer products growth, and high-end chipsets have made their way into cell phones, gaming consoles, computers and TVs - they are a vital part of the "iTubeHD" world we crave more and more.

Will Intel enter the market with a bang or a whimper? Will consumer demand stay strong for visual computing solutions? Be sure to join me (EpiphanyOne

) in the FREE Stock Picking Community to share your thoughts and see what other investors are saying.

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