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Follow UsIn the shoot-’em-up business of graphics chips, Nvidia Corp has rocketed
from obscurity in just four years to become the fastest gunslinger in town. To
the delight of gamers worldwide, the company has consistently delivered
technology that brings dazzling, movielike digital graphics to computers and
game consoles. That helped Nvidia rank as the best-performing stock in the
Standard & Poor’s 500-stock index last year, with its shares up 308%, to
$66.90.
Now, however, the Santa Clara (Calif.) company is dodging a hail of bullets
engraved with its name. PC sales are stagnating. Competition from rivals such as
ATI Technologies Inc and Intel Corp is intensifying. Manufacturing problems are
threatening to delay Nvidia’s next-generation chip. Just to top things off,
the Securities & Exchange Commission is digging into the company’s
accounting practices. No wonder Nvidia stock is down 68%, to $21 this year.
"For the first time in a long time, Nvidia is being challenged," says
analyst Joseph Osha of Merrill Lynch & Co.
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Hard push: Huang has new chips for set-top boxes and notebook computers |
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Cliff |
Chief Executive Jen-Hsun Huang is trying to beat back the challenges. As
sales slow in the company’s core desktop-PC market, he’s pushing into new
markets, including graphics chips for high-end notebooks and such low-end
products as set-top boxes. On July 16, Nvidia released a new set of chips aimed
at low-end PCs and set-top boxes. And Huang is striving to make sure Nvidia’s
next-generation chip, code-named NV30, hits the market later this year, right on
time. "We’re gaining traction in every single market we’re
serving," Huang says.
Still, Nvidia’s problems look like they’re going to get worse before they
get better. The company is having a tough time penetrating the new markets it
has targeted. In low-end graphics chips, for example, Intel is pricing so
aggressively that it is expected to grab 40% of the market by mid-2003, up from
17% now. Worse, ATI introduced its new Radeon graphics chip on July 17, and
industry analysts say it’s a step ahead of Nvidia’s current top-line
GeForce4 chip in speed and graphics quality. Losing its title as the performance
king in graphics chips will probably cause a slowdown in Nvidia’s sales growth
this year. Merrill Lynch’s Osha estimates Nvidia’s revenues will rise 54%,
to $2.1 billion, in the fiscal year ending in January, with net income of $275
million. That’s a hefty retreat from last year’s 87% revenue growth.
How Nvidia fares in the long term will depend on the NV30. If the company can
get the chip out in volume later this year, Nvidia will recover its performance
advantage over ATI and should do well next year. If, however, the NV30 is
delayed several months, the company’s fortunes could spiral downward. Its
profits could fall, forcing cuts in critical research and development. "It’s
going to be a tremendous squeaker, and in this business, you don’t like
squeakers," says Osha, one of six analysts who recently downgraded the
company’s stock. For the fiscal year ending in January of 2004, Osha predicts
revenues will climb only 7%.
Why the squeaker? In trying to outperform ATI’s new chip, analysts and
rivals say Nvidia was several weeks late in sending its design specifications to
Taiwan Semiconductor Manufacturing Co (TSMC), its manufacturing partner.
Complicating matters, TSMC is having problems with the new process Nvidia is
switching to for its high-power chip. Nvidia is working on the problems, but it
won’t guarantee full production volumes for the holiday shopping season.
| A High-flier Crashes Down to Earth |
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| The stock of graphics chip-maker Nvidia is down 68% this year, after having risen 308% in 2001. Here’s its turnaround plan... | |||
| PROBLEM | SOLUTION | Grade | |
| Fight Off Competition |
Nvidia holds 42% of the graphics-chip market, but on July 17, a reinvigorated rival, ATI Technologies, launched a new high-end chip. Analysts predict Nvidia’s market share will fall to 37% by yearend. | Nvidia released new chips for the low-end PC market in July, and by yearend it will release its high-end NV30, to compete with ATI’s new product. | GOOD |
| Maintain Growth | Analysts say Nvidia’s sales will rise 54%, to $2.1 billion, this year, down from 87% growth last year. With sluggish PC growth, bearish Wall Street firms are forecasting growth will slow to 7% in 2003. | Nvidia is moving into markets such as integrated graphics chips for cheap PCs. Nvidia has grabbed 4% of that market, up from zilch last summer. | FAIR |
| Meet Deadline for New Chip |
Nvidia sent the NV30 design to Taiwan Semiconductor Manufacturing, its chipmaker, several weeks late. A new factory process that Taiwan is using could delay volume shipments until after Christmas. | Nvidia has sent engineers to Taiwan to work out glitches at the plant. And it has simplified the chip’s design to smooth production. | FAIR |
| Restore Investor Confidence |
Last year, the SEC charged 11 Nvidia employees with insider trading. In January, the SEC opened an inquiry into whether Nvidia double-booked expenses and improperly logged reserves. The inquiry remains open. | Nvidia fired some of the accused employees. And an internal audit resulted in the company slightly boosting its earnings for the past three years. |
POOR |
The sudden pessimism is a far cry from last year’s glory days, when Nvidia
was enjoying the gamer’s equivalent of a bonus round. Last fall, Nvidia’s
shares rose on expectations of a strong launch for Microsoft Corp’s Xbox,
because it supplies graphics chips for the game player. In the latest quarter,
Xbox accounted for 22% of Nvidia’s revenues. But Xbox also marked the starting
point of the company’s troubles. In November, the SEC charged eleven company
engineers with trading on knowledge of the Xbox deal before it was formally
announced. Nvidia says some employees were fired, but a spokesman declined to
say how many were fired and what disciplinary action, if any, was taken against
others.
During that investigation, the SEC uncovered the potential accounting
troubles. The commission is looking into whether the company double-booked
revenues and improperly accounted for reserves. To preempt any SEC action,
Nvidia restated its financials, boosting profits by $1.3 million, and removed
its chief financial officer, Christine B Hoberg. The SEC inquiry is still open.
For now, Nvidia has a little breathing room. The expense and engineering
expertise required to develop new chips are stiff barriers for potential new
entrants. But to beat back reinvigorated rivals, Nvidia must restore its focus
on the high-end markets that elevated the company to its previous heights.
Otherwise, Nvidia will find its pistol empty in the most important shootout of
its life.
By Cliff Edwards in Santa Clara, Calif in BusinessWeek. Copyright 2002 by The McGraw-Hill Companies, Inc