Expect Margin Pressure for NVIDIA

Product-related issues for NVIDIA (NVDA - Analyst Report) such as the transition from the G80 to G92 series and the recently discovered failure of certain notebook products will pressure gross margins, which we believe will continue for few quarters. We therefore maintain a Hold rating on the shares.

To remain competitive, NVIDIA has invested heavily in research and development, which increased 25.0% in fiscal 2008 and 38.2% in the first quarter of fiscal 2009, and may require more investment, which could further dampen margins. In addition, NVIDIA faces risks associated with international operations as nearly 92% of fiscal 2008 revenue has been from businesses outside the U.S.

Shares of NVIDIA are currently trading at 11.3x our reduced fiscal 2009 EPS estimate of $1.11. We lower our estimates for the second quarter and full fiscal year 2009 and 2010. We also cut our six-month price target to $13.50, representing a multiple of 12.2 fiscal 2009 estimates.

Read the full analyst report on NVDA