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Nvidia's Shares Sink on Analyst's Warning

The analyst predicts the company will negative preannounce its earnings and sale of its chipset business.

Updated from 3:14 p.m. EDT



shares sank more than 13% Monday, after an analyst predicted that the chipmaker will negatively pre-announce its third-quarter financial results and that it will sell its chipset business.

Pacific Crest analyst Michael McConnell downgraded Nvidia to a Neutral rating Monday and cut his financial estimates for the chipmaker.

Acknowledging that he is late to downgrade Nvidia, with shares down 73% so far this year, McConnell said he thinks the stock could be vulnerable to a further 25% downside. What's more, he projects that Nvidia's EPS next year will be 50% lower than the average Wall Street estimate.

Part of McConnell's revised outlook for Nvidia comes from his belief that the company will divest its chipset business next year, eliminating a business that he had expected to contribute 21% of Nvidia's revenue in the current fiscal year. The brunt of the company's revenue comes from sales of PC graphics processors.

McConnell points to recent changes in the company's strategy and lack of details about future chipset products as hints that Nvidia is moving away from the chipset business. He also says that 40% of the 360 employees recently laid-off were in the chipset research and development group, according to his checks.

The note drew a sharp response from Nvidia Investor Relations Vice President Mike Hara who said the company had no plans to exit the chipset business and disputed the claim that 40% of its layoffs affected its chipset engineers.

"We are continuing to invest in our chipset business, and drive new technology and platforms for all PCs. This is a long term and important strategy for us," Hara said.

Meanwhile, with demand for PCs weakening and Nvidia suffering its own competitive problems, McConnell says a negative preannouncement for Nvidia's third-quarter financial results "appears imminent."

Nvidia shares closed down 13.1% to $7.85, setting a fresh 52-week low earlier in the session at $7.31.

A year ago, Nvidia's stock was trading between $36 and $39 as the company dominated the market for graphics processors used in PCs.

The company fell upon hard times beginning this summer, when rival ATI - owned by

Advanced Micro Devices


- released a graphics chip that offers consumers impressive performance at a low price, forcing Nvidia to cut its own prices.

Nvidia's problems got worse in July, when it revealed that some of its previous generation of graphics chips were affected by a glitch that caused them to malfunction. In August, Nvidia took a $196 million charge to cover warranty costs, but reassured investors when it said it did not expect any more charges as a result of the incident.

According to McConnell, the "fallout" from the chip defects will push its market share in notebooks to below 50%.