As the only remaining major independent player in the market for Graphic Processing Units (GPUs) used in PCs, NVIDIA Corporation (NVDA) is well positioned to benefit from increased graphics requirements. We are positive on the company's CUDA initiative, which should drive additional uses for its installed base of GPUs.
For the second quarter of fiscal 2009, NVIDIA expects it to be seasonal with a sequential decline of 5% in revenue. Management expects an increase in gross margin of approximately 100 basis points.
Operating expenses for second quarter are expected to be flat or slightly up. Hiring will continue but at a moderate rate, while other expenses are expected to decrease. Shares of NVIDIA are currently trading at 16.5x our fiscal 2009 EPS estimate of $1.33.
The company is also gaining traction in its new product offering and has controlled operating expenses. However, product related transitional issues related to the transition from the G80 to G92 series have taken a toll on gross margins, which we believe will continue for a few quarters.
We, therefore, lower our estimates for the second quarter and full fiscal year 2009 and set a six-month price target of $23. We maintain a Hold rating on NVIDIA shares as we expect spending on technology to remain muted. Our target price represents a multiple of 17.3x our fiscal 2009 EPS estimate, a premium to the industry mean, which we believe is deserved given NVIDIA's strong position.
Read the full analyst report on NVDA.
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