Deutsche Bank Cuts Nvidia to Sell

It says risk-reward is out of whack at 2.6 times sales.
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Updated from 9:16 a.m. EST

Deutsche Bank advised clients to sell

Nvidia

(NVDA) - Get Report

Tuesday, saying the chipmaker's market share gains are likely to slow down as competitor

ATI

(ATYT)

introduces a new product line.

The brokerage cut Nvidia to sell from hold and maintained its price target at $30. The stock closed at $37.28 Monday, just 62 cents below its 52-week high and up about 83% since the start of the year. Nvidia's shares were recently down 6.2% to $35.52 in heavy trading.

Nvidia is trading at a price-to-sales ratio of 2.6, Deutsche calculates, a multiple it says is well above prebubble peaks of about 2.2. "The risk-reward is negative."

In a research note, Deutsche conceded that Nvidia's desktop market share is strong: 50% of discrete units, 63% of the market's overall revenue and as much as 87% among gaming enthusiasts. But further gains will be stifled by the recent launch of ATI's X1000 series.

The brokerage said the fourth quarter of 2005 will probably be Nvidia's peak share quarter for the current product cycle. "We expect a competitive reversal to put pressure on Nvidia's ability to deliver on its mid-40% gross margin target, with the Street implicitly modeling 42.5% gross margin for fiscal 2007."

Analysts surveyed by Thomson First Call expect Nvidia to earn $1.66 a share this year, $2.05 a share next year, and $2.27 a share in the year ending January 2008.

In addition to the desktop battle, Deutsche says Nvidia faces other near-term challenges, including a possible erosion in chipset revenue and margin thanks to the reworked CrossFire launching at ATI. "Moreover, the persistent talk of PS3 delays poses the risk of market disappointment on lower/delayed PS3 royalties."