Investors Look Past Nvidia's Troubles, Reward Its Growth

Shares of the graphics chipmaker are up 17% after its dirty laundry was aired Monday morning.

Author:: Diane Hess
Publish date:: Apr 29, 2002 3:37 PM EDT

Shares of graphics chipmaker

Nvidia

shot up more than 17% Monday after the company was able to convince investors its accounting troubles are behind it and growth prospects remain sound.

Nvidia -- which rose more than any other stock in the

S&P 500

last year, gaining a whopping 308% -- said it would restate results for the past three years following an extensive review by the company's audit committee at the request of the

Securities and Exchange Commission

. It also said its chief financial officer was going on a "leave of absence" while it searched for a replacement.

Investors were apparently more interested in the company's earnings forecast, which it delivered simultaneously. Nvidia said it expects first-quarter earnings to triple from the year-ago period to $79 million to $84 million, or 45 cents to 48 cents a share, on revenue of $570 million to $580 million. Its previous revenue estimate was $535 million to $540 million.

The Little Things

While a restatement is never good, analysts said the damage appeared limited. "If there is no finding of anything but errors, they appear to be small errors," said Brian Foote, an analyst at Ryan Beck. "The preliminary restatement of its numbers does not look of high magnitude."

Nvidia said that its total net income for the three-year period would increase by about $1.3 million. Net income will go up $2.1 million in 2002, go down $3.7 million in 2001 and up $2.9 million in 2000.

Still, in the post-

Enron

era, such an admission can shake confidence. "Now analysts have to go back three years and look over what is different from what was originally presented," said Foote.

On a conference call, Nvidia said the accounting changes fell into "four buckets": simple errors, such as double-booking an expense; bad estimates, in which the company was off in its approximation of future events; questionable accounting judgments; and audit adjustments.

In February, the SEC launched an inquiry into whether Nvidia improperly disclosed assets in the fourth quarter of 2000 and the first quarter of 2001. The SEC is also looking into whether product costs of up to $3.6 million should have been recorded in the first quarter of 2001, instead of later that year.

Nvidia's chief executive officer, Jen-Hsun Huang, said he didn't know when the SEC investigation would close but that its internal review, which cost $3 million, was the most important phase of the process.

The SEC inquiry has been followed by shareholder lawsuits, as is often the case. They allege that Nvidia misrepresented its true prospects until certain officers and directors could sell $66 million of their own stock.

Last year, the SEC investigated Nvidia employees for insider trading based on information that the company had won a contract to provide chips for

Microsoft's

(MSFT) - Get Report

Xbox.

Growth Questioned

Analysts made little of the lawsuits, but said maintaining revenue growth was a big challenge.

"You can't maintain a 65% growth rate

which was Nvidia's revenue guidance for this year when you have $2 billion in sales and competitive pressure, for very long," said Foote.

For his part, Foote expects Nvidia to have top-line growth of 5% to 10% over the next five years.

Nvidia is facing competition from

Intel

(INTC) - Get Report

and

ATI Technologies

(ATYT)

for lower-end chips, while its business is dependent on PC demand, which remains lackluster.

Also on Monday, Nvidia said it has entered into arbitration with Microsoft, as a result of a dispute between the two companies over pricing and volume of Xbox chipsets. Microsoft has asked for damages for alleged violations of its contract agreement and is seeking lower prices.

While the arbitration is in process, Nvidia said it would recognize the difference between what Microsoft is paying and what Microsoft is arguing it should pay as deferred revenue.

"To their credit, they are being very conservative," said Foote. "The financial impact is probably neutral. But from a strategic standpoint, you have a major customer question your pricing and taking you into arbitration. The question is: Will other major customers follow suit?"