Should You Buy It: Nvidia Makes Its Case

It's been a difficult year so far for graphics chipmaker Nvidia (NVDA - commentary - Cramer's Take), whose shares are down 41% in 2008, closing Wednesday at $20.10.

But the tide could soon begin to turn for the company, as it was upgraded from Underweight to Equal Weight at Morgan Stanley on Tuesday. This marks the third upgrade for the company in the past month, in addition to an initiation of coverage with an Outperform rating from Cowen on Wednesday.

With that in mind, I'm here to answer readers' questions: Should you buy it? Does Nvidia hold value at current levels, or should the stock be avoided?

Nvidia has had its troubles of late, with customers carrying higher inventory levels. The company has also lost some market share to Advanced Micro Devices (AMD - commentary - Cramer's Take). In fact, when management posted fiscal first-quarter (ended April) results back on May 8, Nvidia's earnings of 37 cents a share came in two cents below expectations.

On the other hand, the underlying graphics market is exhibiting solid growth. The company's shipments for graphics processor units were up 42% year-over-year last quarter, well outpacing growth in the computer market. Management credits demand for gaming and innovative Internet applications that require users to obtain richer graphics capability.

Nvidia's the Beaten Down Stock to Love

Both Nvidia and AMD are set to launch a wave of new products this year. AMD has a head start, with its new items already on the market, but management is confident that it will catch up when its own goods hit the shelves in the fiscal third quarter.

In the meantime, it's also worth noting that the company has $1.62 billion ($2.90 a share) of cash on its debt-free balance sheet. Backing this out, Nvidia trades at just 11 times expected fiscal 2009 (ending January) earnings of $1.58 a share. That's near the low end of the company's historical valuation range, and below the average 14.6 times earnings multiple on the S&P 500.

At current levels, the decision to buy Nvidia doesn't hinge on timing a potential turnaround in the business, rather, it's more important to have a sense that the stock is at a level that is already pricing in these risks.

And given the company's pristine balance sheet and solid cash flow, I believe that Nvidia is attractive to purchase at current levels.

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David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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