Lehman out on semis

Tim Luke out with a summary of his recent trip to Asia, there's a conference call @ 10:30am.

Notebooks remain strong, desktops and servers are weaker; he thinks Intel's second half numbers look conservative. Broadcom and Nvidia could have lowered numbers for the quarter but he believes there's valuation support – I agree there. Not from Lehman, but I've read more than once that a fire at an LG battery plant is constraining notebook builds for HPQ for the quarter and they've ratcheted down their plan for the quarter to get in line w/ their limited battery supply.

Cell phones are weak with inventory adjustments at Nokia and difficulties at Sony Ericsson and Motorola weighing on growth. Totally right, Nokia has been pulling back at the high end at a couple of their supply chain partners.

He cites some slowness in Xbox and PS3. My observation is that following the initial pop following console price cuts, PS3 picked up some share but the data has been moderating. Xbox, which enjoyed an early lead in the market has held up but definitely has been slowing. Halo 3 drove some good console uptake around the holidays but last month's data was showing some sluggishness. The Wii continues to dominate the category. It seems like the only thing keeping Nintendo's console shipments capped is limited supply – it's amazing to me that over a year after it's release one still can't walk into a store and walk out with a Wii.

Apple is still not around and NAND remains weak. Samsung thinks they'll be back in April, Hynix thinks June. I think Apple is symptomatic of the problems in the NAND market. Sure, they're a big portion of the sales. Sure, they matter. At CES I saw literally a hundred different NAND players that no one will buy. That to me is the bigger problem… too many marginal players that don't really belong in the marketplace have created an overestimate of how much NAND is needed. This will take time to correct.

AMD in play?

This piece of irresponsible journalism suggests Nvidia might buy AMD. That would never happen because of antitrust concerns. It'd also be a one way trip to $17 for Nvidia stock if they tried something like that.

The article also suggests IBM might be a buyer. That makes more sense. I think China's Lenovo or STM are the most likely candidates as far as potential buyers of AMD go. Both would be subject to quite a bit of scrutiny as they're foreign companies. The currency benefits to STM are significant as dollars are being quoted in pennies.

Nvidia (NVDA) under $24

I think the stock holds $23.5 and is a buy under $24.

If it trades $23, I'm out.

Nvidia (NVDA) 4Q:08 Results

Nvidia, the market leader in graphics chips, roughly hit consensus numbers. Revenues were slightly better, gross margins were slightly lower and operating expenses were higher. A lower tax rate (8 vs the 13 est) allowed them to beat consensus estimates. This is a lower quality quarter than the company has been putting together of late. Two quarters ago they were bursting at the seams with upside, this quarter is technically a miss as they would have missed consensus without the lowered tax rate. The company guided next quarter slightly down but less than seasonal and said seasonality is typically down 5%, so the range becomes down 1-4%.

Nvidia has been taking share from AMD (who bought ATI last year). The AMD integration has been sloppy at best -- product delays are now a given at AMD. Nvidia has retained the best gaming chip title (in part due to AMD's missteps) and consequently attracts a significant share of the add-in market on top of their growing dominance of the integrated graphics chipset market.

This was unquestionably a sloppy quarter. The easy share has been taken. Sequential growth is flattening out after a couple of years of very strong growth. The stock trades at roughly 18* this year's estimates and roughly 16* next year's number. For perspective, Intel trades at say 15*08 and 14*09. So Nvidia has a slight premium to Intel. Nvidia also isn't as screwed up as Intel is. I think Nvidia is fairly valued at $24-25 in the present environment and I'd be a seller around $30. The downward spiral in the stock of late makes me think it can move to the top of that range just because numbers aren't really coming down here.

More concerning perhaps is that Nvidia missed numbers and chose to play games with the tax rate to make it look like they didn't. That smacks of poor character and bears further scrutiny. I'll be going over their 10Qs in the near future.