WE ARE LOWERING OUR FISCAL 2011 revenue and earnings-per-share estimates on Nvidia (ticker: NVDA) to $3.5 billion and 39 cents, respectively, due to lower revenue and margins. We are also lowering our fiscal 2012 revenue and EPS estimates to $3.7 billion and 65 cents per share.
We believe the stock trades with a forward price/earnings range of 11 times (trough valuation) and 13 times (current group valuation) or $7 to $9 per share, and given no or limited upside in the stock from current levels, we are downgrading the stock from Neutral to Underweight.
We published a note on July 28 highlighting the severe decline (i.e., market-share gains for competitors) in Nvidia 's graphics processor (GPU) and chipset shipments in second-quarter 2010. In the second quarter, Nvidia's graphics-chips shipments declined over 26% quarter-over-quarter while total market shipment of PC graphics components was down only 2.5% quarter-over-quarter.
Post our research note highlighting the second-quarter share loss, Nvidia negatively preannounced its July-quarter results and now expects revenue to decline about 19% quarter-over-quarter versus its prior guidance of down 3%-5% sequentially. According to Mercury Research (industry third-party research), Nvidia lost about seven percentage points of market share in the quarter, while both Advanced Micro Devices (AMD) and Intel (INTC) gained market share.
Fundamental PC environment is expected to be difficult in the second half of this year and should slow any initiatives by Nvidia to improve its competitive position. Weakness in the PC food chain continues due to China and Europe, according to our Asia Hardware team, and they expect continued softness through the remainder of this year.
Competitors will make it difficult for Tegra (mobile applications processor products) to get meaningful traction with Tier 1 original-equipment manufacturing (OEM) customers. Although the Tegra product is well designed, the competitive environment remains heated as Texas Instruments (TXN), Qualcomm (QCOM), Marvell Technology Group (MRVL), Samsung and several other semiconductor vendors have competitive solutions in the market.
Tesla and Quadro products are doing well, but not enough to offset the significant weakness in the company's core graphics market. Nvidia's enterprise-focused segment continues to do well given the refresh cycle and solid spending on high-performance computing (HPC) initiatives – but we estimate Tesla and Quadro account for only 20% of Nvidia's revenue mix.