Comeau: AMD Woes Mean Nvidia's a Buy
After Monday's close,
AMD
(AMD) - Get Report
lowered its first-quarter revenue outlook to $1.5 billion due to weaker-than-expected sales across its business segments, and it also announced a plan to cut 10% of its work force by the third quarter of this year.
However, this latest twist in a long line of disappointments from AMD shouldn't be interpreted as the end of days for tech. Rather, it is creating a buying opportunity in a competitor.
First things first. AMD has not been considered a paradigm of competent execution since its glory days in late 2005/early 2006, when the company was riding high on the back of its Opteron server chips, which were simply blowing everything
Intel
(INTC) - Get Report
had out of the water. But times have clearly changed, and AMD has had consistent trouble getting high-quality products out the door on time in sufficient numbers to its customers.
In addition, AMD's acquisition of GPU specialist ATI in 2006 has been pretty much a mess as the combined company lost tons of share in graphics chips to
Nvidia
(NVDA) - Get Report
, which has had both superior product offerings and a superior management team.
So, investors shouldn't go too far when extrapolating AMD's negative announcement to the rest of the tech world. If Intel said that sales were lower-than-expected in all business segments I'd definitely be worried, but in this case we're getting our news from one of the weakest hands in the PC supply chain. With that in mind, I think Nvidia is a clear buy off of AMD's announcement.
Like many former momentum favorites, Nvidia has been truly clobbered, knocked down about 50% off its highs from last October. In addition to the general selloff in tech, the stock has been hit by fears over a peaking PC cycle, as well as concerns over margins given Nvidia's rampant spending on new areas like mobile phone development, which have yet to pay off. However, that decline looks like it has brought the stock down to attractive levels, now trading at 11 times a full-year earnings number of $1.67 a share that has already been cut numerous times.
Also, AMD's weakness just might benefit Nvidia. AMD will likely have to cut R&D spending to get closer to profitability, and that will only delay a catch-up to Nvidia on the product side. Historically, the GPU market has often gone back and forth with the two taking turns as leader of the pack, but the market may be evolving into one where Nvidia is structurally on top.
There have been recent concerns that the standalone GPU will eventually die, but considering how bloated
Microsoft's
(MSFT) - Get Report
operating systems keep getting, a little additional horsepower will always be necessary, and in any case, Nvidia increasingly looks like it will own the market for power users longer-term.
Plus, Nvidia has a very strong balance sheet with $1.8 billion in cash and securities, giving it superior financial flexibility, and it could see upside in the future from what I expect will be booming sales of the
Sony
(SNE) - Get Report
PlayStation 3 console, as well as from its ventures in high-performance computing. Therefore, Nvidia looks like a good bet here while chip sector sentiment is in a funk.
In keeping with TSC's editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Comeau is a research analyst at TheStreet.com. In this role he performs stock analysis for
, and is also a regular contributor to RealMoney.com. Prior to his arrival at TSC in June 2004, Comeau worked as a Consultant to Toyota Motor North America, performing in-depth research on automotive industry issues, primarily in the areas of alternative engine technologies, competitive analysis and macroeconomics. His primary market interests include consumer technology, specialty retail, and small-caps. Comeau received a bachelor's degree in Finance from Brooklyn College, and has completed Level 1 of the CFA program.. He appreciates your feedback;
to send him an email.