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ATI Falls on Nvidia's Woes

Shares of ATI (ATYT) tumbled Friday as investors fretted the graphics chipmaker could be hurt by the silicon price war and PC weakness cited by rival Nvidia (NVDA - Get Report) Thursday when it reported a massive earnings disappointment.

But most analysts cast the ATI selloff as a buying opportunity, though the stock suffered a downgrade from Wedbush Morgan.

ATI shares were recently down $1.17, or 7.4%, to $14.72, while Nvidia was reeling, down $4.50, or 30.9%, to $10.06.

In a note downgrading ATI to hold from buy, Wedbush analyst David Wu predicted that the severe pricing actions by Intel (INTC - Get Report) and the price war in mainstream discrete desktop chips "that was so devastating to Nvidia will also have a measurable impact on ATI's fiscal fourth quarter." He cut his earnings estimate for ATI's fourth quarter to 18 cents from 25 cents (compared to a consensus estimate of 21 cents). Wedbush hasn't done banking for ATI.

But a handful of other analysts said Nvidia's problems are company-specific and don't augur similar shortfalls at ATI.

Indeed, over the past year ATI has made substantial inroads into the graphics chip business once dominated by Nvidia, helped by its greater exposure to notebooks, which have been steadily increasing as a share of PC sales. Reflecting the market's greater confidence in ATI, as of Thursday's close its shares had gained 23% from year-ago levels, while Nvidia shares had lost 29% of its value.

CIBC analyst Rick Schafer pointed out in a note that Nvidia's troubles stem mostly from weaker pricing and volumes in lower-end graphics chips, where Nvidia has much greater exposure than ATI. Other problems owe to Nvidia's market-share loss, but Schafer said ATI has been taking share. He has an outperform rating on ATI.

Still, he said he's somewhat tempered his view on ATI in the near term. "While we believe our August quarter's $535 million and 21 cents EPS estimates are achievable, we do not expect ATI will significantly beat forecasts as they have the past several quarters," he said. CIBC doesn't have an investment banking relationship with ATI.

Likewise, Scotia Capital said it's keeping its outperform rating on ATI, noting the Canadian-based graphics chipmaker has scored the majority of design wins based on Intel's PCI Express, which bodes well for future growth. ATI also has already disclosed it would be aggressive on pricing and has subsequently gained share, Scotia noted, adding that it believes Intel's desktop share gain wins "did more damage to Nvidia than ATI."

Scotia doesn't have an investment banking relationship with ATI.

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