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NVIDIA Chosen for New MacBooks - Verdict & Prospects

Posted on | October 15, 2008 Time: 11:46 pm |

Some good news today on the NVIDIA front, as Apple announced the specs of the new MacBooks; Despite rampant suspicion of a lower price range for low-end models ($800-$1000), most prices were kept the same except for the bottom offering, which now goes for $999. While not a bull on Apple right now, I respect their commitment to brand preservation in the face of price pressures. It should serve them well in longer-term analysis and modeling.

NVIDIA’s new line of GeForce 9400m GPUs (graphics processing unit for the fortunately ungeeked) will be in all three MacBook models - MacBook, MacBook Pro, and MacBook Air. The PR quip from the companies goes like this:

“The NVIDIA GeForce 9400M architecture delivers an ideal combination of visual computing horsepower and energy efficiency in a single, highly-integrated package that we’re using to bring a whole new level of graphics performance to our MacBook users,” said David Moody, Apple’s vice president of Worldwide Mac Product Marketing

Profit Potential is - or rather Remains - Nebulous

Even if I was brave enough to make an incremental revenue prediction, I’d still be too uninformed on the 9400m’s cost structure to make a good estimate on margins. NVIDIA’s GPU margins have been all over the map in recent quarters, even posting an operating loss in the second quarter. From looking over Apple’s most recent 10-Q, I would pun the annual run rate on MacBooks at around 5 million units. To say that there’s around $100 of gross margin per NVIDIA GPU wouldn’t be a fantastic stretch, which would have our back-of-the-envelope gross profit at roughly $500 million over the next year. I’m in no way trying to call the over/under on this one, just simply adding some dimension to the potential for operating profits.

Despite the uncertainty over the impacts to NVIDIA’s earnings in the short term, it is a victory for confidence on behalf of vendors. After a manufacturing glitch earlier in the year that affected chipsets in both Dell and Apple machines, there was a prevailing fear that NVIDIA could lose out to Intel (INTC) and AMD on future designs.

There was also extreme weakness in GPU sales during NVIDIA’s second quarter; revenue was down 23% sequentially and they got sideswiped by AMD on average selling prices in some lower-end models. Management did a good job of owning up to the errors in strategy, and the company is still expected to earn $1.00 per share for the full year on the back of strength in notebooks, gaming consoles, and professional products.

Fundamentals Point to….Value Stock?

Because of the whacking NVIDIA shares have already taken at the hands of product recalls and earnings shortfalls, the stock now has some intriguingly value-centric traits. NVIDIA is still the market leader in most segments, and the stock’s multiple has dropped to 9 times this year’s estimates. Long-term growth EPS growth is still estimated to be 15%, and the company’s current assets alone represent over 60% of market capitalization. Combine that with absolutely no long term debt, and you have a stock that can attract investors from several corners of the style box.

Classy Coattails

Apple is the vendor with the most sales upside potential - according to DisplaySearch their share of the PC market grew to 10.6% in the second quarter, representing a 400 basis points expansion from 2007. In such a mature market, that kind of growth is staggering. If the performance of the GPU is as good as promised (5x better by some benchmarks), NVIDIA could make a strong case for their continued market leadership in the high-end graphics space. On a broader level, the company can make or break its larger, defining proposition - that GPU is a smarter, more efficient way to process tasks & graphics on a computer than core logic, Intel-dominated computing.

Disclosure: Author does not hold shares in the companies mentioned. NVIDIA is held in the author’s Secular Trends Model Portfolio.

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