UBS Securities downgraded its rating of chipmaker Nvidia Corp. to Sell from Neutral on Friday, on competitive pressures and execution issues that may limit growth. The brokerage lowered its price target to $8 from $12.75.
Nvidia sharply lowered fiscal second quarter guidance for sales to a range of $800 million to $820 million from the previous range of $952 million to $972 million citing weakness in consumer graphics in Europe and China.
“We acknowledge the regional issues but cite key structural issues: Nvidia lost 900 basis points of discrete graphics processor (GPU) market share to Advanced Micro Devices Inc. (AMD) in calendar second quarter and losses may continue given AMD’s strong road map, and its chipset business is in secular decline,” said Uche Orji, an analyst at UBS Securities.
The analyst said the key structural issues also include the low-end GPU market is being pressured by the integrated graphics in Intel’s Westmere processors, and this will only get worse with the next generation Sandy Bridge.
UBS Securities said Nvidia’s GPU disadvantage stems from its attempts to enable advanced gaming and GPU computing, while AMD has focused solely on gaming. As a result, over the past two years, AMD has had better time to market with lower cost, while Nvidia’s approach added risk, adversely affecting execution.
Although Nvidia currently has $3 per share of cash and view this as reasonable support for the stock, Orji still sees downside risk given the strategic challenges. He lowered his sales and earnings estimates on near-term weakness and expectations for slow growth.
Orji’s 2011 second quarter EPS estimate is down 40 percent to $0.12, and his estimate for the year is down by 32 percent to $0.65. His 2012 estimate was cut by 41 percent to $0.70 and the 2013 estimate by 35 percent to $0.85.
Orji’s estimates for sales are also down, with 2011 second-quarter estimates at $809 million, a 17 percent drop. He estimates 2011 sales will fall by 15 percent to $3.449 billion.
Nvidia shares closed Friday up 0.66 percent at $9.19 on the Nasdaq, while in after-hours the stock rose 0.33 percent at $9.22.