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Nvidia Looks Vulnerable After Nexus Loss

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While its discrete graphics card business is still relatively strong, this is a market that, overall, will continue to shrink in the coming months and years.

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Graphics chipmaker Nvidia (NASDAQ:NVDA) is in a difficult position long term. While its discrete graphics card business is still relatively strong, taking market share in 2012 from rival AMD (NYSE:AMD), this is a market that, overall, will continue to shrink in the coming months and years. To its credit Nvidia has attempted to move into different markets, most notably the low-power mobile SoC (system on a chip) market with its Tegra line of ARM-based solutions. Now, it is in the process of launching its fourth generation of the Tegra based on the Cortex A-15 core, for which early benchmarks are long on big numbers and short on context. The news last month confirming rumors that the company would not be supplying the SoC at the heart of the next Google (NASDAQ:GOOG) Nexus 7 tablet deals a serious blow to the company's projected sales for the rest of 2013.

In response to that there was a flurry of press releases and announcements by the firm, which are obvious damage control to tout some wins for its GriD cloud fabric and unveil some more information about the Tegra 5. Of course, the Tegra 4 is not due for a few months yet and this, along with its cost and lack of internal LTE made the choice an easy one for Google. Really, the Nexus 7 originally went to Nvidia's Tegra 3 because Qualcomm's (NASDAQ:QCOM) Snapdragon S4 rollout was delayed due to 28nm problems at TSMC (NYSE:TSM). Once TSMC's problems were solved, Nvidia's delays in getting the Tegra 4 out the door ensured that Qualcomm would get the contract.

The Nexus represented fully 60% of Nvidia's Tegra 3 sales in 2012. Here we are in 2013 and the company does not have shipping silicon to compete with the Cortex A15-level SoC's powering tablet and phones now. Its Tegra 4i – a Cortex A9 quad core SoC – will not be shipping now until Q1 2014, and there is nothing unique about the SoC . With these delays and, frankly, lack of comparative advantage over its competition, it is no wonder that the stock price has been incapable of rallying.

The rally above $13 to close last week is an important short-term technical signal built on the firm's announced share buyback in addition to its dividend program. When your revenues are due to be flat and your next mobile SoC will use last year's cores -- albeit with an integrated LTE modem -- paying shareholders to wait is a good PR strategy to support the stock price. Given the continued disconnect between stock prices and market fundamentals, this is an environment conducive to bullish trading signals.

One of the bullish arguments for Nvidia at these prices is the company's $3.73 billion cash reserves, which translates into more than $6 per share of the price of the stock. However, conversion of that cash into treasury is not adding shareholder growth potential but rather supporting those willing to hold through a year that has little good to offer them. This is especially true in a market making new all-time high after all-time high.



Looking at the current situation as of the close on April 12, NVDA, to end Q1, put in a very impressive engulfing reversal bar (#1) which took the stock back to $12.80 and negated the 2-week downtrend that threatened to take the stock back towards $12 per share. Normally, that would be a bullish sign, but the lack of follow-through the next week called that into question. During the first two trading days of April the stock has sold off with extreme prejudice, violating last week's low and confirming that, at best, the stock is rangebound between $11.95 and $13.15 per share.

But, that signal has now been negated by the announcement of the expansion of the share buyback program which began back in November. It is easy to spot the support in the price of the stock every time it approaches $12 per share. I would suspect from the chart action here that Nvidia is a buyer of its own stock at this level. This may be the reason for the long tails on the weekly candles (black arrows).

One of the effects of the share buyback has also been to dampen volatility in the stock. Below is a table of the weekly trading statistics for Nvidia. For the period these statistics cover (165 weeks) the average weekly price envelope (High to Low) has been $1.29. It is clear that since November the price volatility weekly has been far less than that. I also note that the short interest in Nvidia rose sharply after the buyback began. So, it looks like the stock is trapped between the company supporting the stock from below and short-sellers capping it below $13.20.



Where are we now? The stock closed above $13.00 last week (#2) at $13.09, which would have been my initial target for a bullish breakout. But, the stock could not muster the strength to close above the December high at $13.19. There is a ~79% chance of a $0.15 move which would break the high from the week of April 8 to April 12, and on that occurring would limit the size of any downside reversal. A close this week above that price should bring in momentum players and induce some short selling and create the opportunity for a rally. If we see a weekly close above that price, it would bode well for a more significant move higher, especially if April closes above that level.

But, fundamentally, the company is on shaky ground while the stock is being actively supported in price. Right now, the bullish general market environment is Nvidia's best chance to see a rally for the rest of 2013. If it does not happen the current rangebound activity will likely continue.

No positions in stocks mentioned.
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