NVDA Rising: Pondering Tegra 4, Operating Expense Trajectories

Shares of Nvidia (NVDA) are up 28 cents, or 2.3%, at $12.65, following a report last night of better-than-expected fiscal Q4 profit per share but an outlook for revenue that was below what analysts had been projecting.

In a conversation withCEO Jen-Hsun Huangfollowing the company’s conference call, he indicated to me that perhaps the company is being cautious about the current quarter in a way that would leave room for some upside, though it’s impossible to be certain if that’s the case.

There are some minor downward revisions of estimates today, and of price targets, and one downgrade, that I’ve seen, from Needham & Co.’s Rajvindra Gill,

Hans Mosesmann withRaymond James this morning reiterated a Strong Buy rating on the shares, while cutting his price target to $17 from $20.

Mosesmann thinks the lighter outlook for this quarter is nothing to worry about, that the new version of Nvidia‘s “Tegra” line of chips, Tegra 4, will sell, and that the company was smart not to provide an outlook for Tegra for the full year:

The street will likely look past the weak April quarter guidance from Nvidia, seeing it as a bottom due to the Tegra3 to Tegra4 transition. Bears will claim that Tegra4 demand is just not apparent, but we would point out shipments start in 2Q, Tegra4 is the apps processor to beat in tablets 2013 (despite amusing kindergarten antics by a blue-teamer now with the red team) and design wins are actually above Tegra 3 levels. The fact that Nvidia won’t give full year guidance for Tegra (as in the past) actually dissipates the bear target game, and takes the �too conservative or too aggressive� debate off the table. We applaud management’s move as it�s a sign of confidence going forward.

Mosesmann also thinks operating expenses are not something that should be overly concerning:

A key focus on the call was management�s opex guidance for 7% q/q growth despite a 15% drop in sales. Using FY13 as a framework, F1Q opex was up 6% despite a sales decline of 3%, so there is a historical precedent. More importantly, management expects opex to remain stable for the remainder of the year. Looking back at FY13, F2Q-F4Q opex run-rates were only 1% above F1Q levels, and thus we don�t expect opex be a major driver of estimate revisions going forward.

Nomura Equity Research‘s Romit Shah reiterates a Buy rating on the stock, while cutting his price target to $15 from $16. Shah cut his estimate for this calendar year to $4.3 billion in revenue and $1.05 per share from a prior $4.6 billion and 75 cents per share.

Shah notes the company seems to be struggling with tablet sales for its Tegra applications processor, but that it is managing to keep margins up despite rising operating expenses:

Both GPU and Tegra are expected to decline double digits [this quarter] with Tegra expected to decline more than GPU. We believe Tegra�s 40+% sequential decline reflects weak sell-through of tablets in Q4, share loss, and transition from Tegra 3 to Tegra 4. On the positive side, gross margin guidance is flat at 52.9% despite a steep revenue decline. Opex, however, is $28mn higher qoq and $30mn higher than our est.

Craig Berger with FBR Capital reiterates a Market Perform rating on the shares, writing “While Mobile World Congress may provide a small stock boost as NVIDIA discusses new mobile products, shares could be rangebound until material design wins emerge for Tegra 4, LTE baseband, Shield, or Grid, particularly with weak 1Q13 guidance.” He was referring to the big mobile confab that kicks off in Barcelona a week from Monday, February 25th.

Berger notes that while there is limited evidence thus far for Tegra 4 design wins, nevertheless, the company is cash-rich:

While management touts many Tegra 4 design wins, market confirmation of these wins is limited, and 2013 revenue growth or shrinkage remains to be determined.NVDA is one of the more attractive PC chip stocks in the sector given mobile growth opportunities, its profitable model, and $6/share of net cash.

Needham’s Gill, cutting his rating to Hold, writes that “Our thesis has changed for two fundamental reasons: 1) rising OPEX growth is outpacing revenue growth, eliminating any earnings leverage (OPEX growth of 17% Y/Y vs flat rev growth in CY13) and 2) lack of meaningful Tegra growth – limited traction in smartphones, lackluster sell-through of MS Surface Tablet RT tablets, and share loss to QCOM in Android-based tablets.

Gill is deeply skeptical of Tegra 4′s prospects, at this point:

As we alluded to in our preview last week, we cut our Tegra numbers to reflect an inventory correction in the non-Apple tablet market and lackluster sellthrough of MS Surface RT tablets. Mgt. cited the transition from Tegra 3 to Tegra 4 as the reason for the Q/Q decline in Tegra sales in CQ13; but we believe the aforementioned factors plus share loss at the Google platform to QCOM are more likely to be the reasons for the soft expectations. Based on our bottom-up view shown below, we believe Tegra will be down ~45% q/q in C1Q13, and down ~12% for the year. As we show, we believe Tegra is suffering from a lack of smartphone penetration, weak sell through on existing smartphone platforms (i.e. HTC), lower than expected MSFT Surface sell through, and share loss on the Google Nexus platform.