Nvidia's Drop Seems Strange

I was researching Nvidia and after they brought out numbers the stock promptly recieved an 18% haircut in 2 days. I was trying to figure out the reason why and came across this article. It states that there will be a jump in expenses for Q1 of 2008. Okay, so I took a look at transcript of their earnings call to see why their expenses rose and here is what they said:

We expect operating expenses to increase quarter to quarter because of
the normal Q1 issues of less vacation in Q1 than Q4, higher FICA expense in Q1
and Q4. In addition, we expect to have approximately $7 million of incremental
expenses in Q1 that will come from acquisitions we’ve recently made.

The result is that we expect operating expenses to increase 8% to 10%.

So due to seasonality, aquisition charges of $7 million, and FICA expenses (possibly from adding 376 new people, 2/3 of which are in R&D) they will be paying 8% to 10% more in expenses. All three of these things should be 1-time deals and NVDA should be able to control them for the most part.

Also this article sites operating margin shrinkage from 46.2% to 45.7%. So I was thinking maybe they were having trouble with pricing power or something along those lines. Instead I looked at the transcript again and found this.

Gross margin for the quarter was 45.7% GAAP and 45.9% non-GAAP. This
was the first time in 13 quarters that we haven’t had a non-GAAP gross margin
increase quarter to quarter. During the quarter, we experienced some cost issues
with regard to the 8800GT, which we hope to resolve in the next two quarters.

So they had some problems with the 8800GT costs and this dropped the margin slightly. I guess saying that the problems won't be ironed out for 2 quarters is what dropped the stock so quickly. The Bear Stearns guy, Gurinder Kalra, asked what those cost issues were and this is what they said:

You know, 8800 GT was ramped probably faster than any high-end GPU in
our history. As I mentioned in my comments earlier, in just four months of
production we shipped over 2 million 8800 GTs, and this is a high-end GPU. The
die size and the number of transistors of the 8800 GT is far more than any
microprocessor you currently have -- core-two dual and otherwise. And so this is
a very complex processor and yet we ramped it incredibly hard.
We had some manufacturing challenges in the beginning and we caught it, we fixed it, and now we are going to see far better yields going forward. But it affected our cost in Q4.

So they went with banging out the high end (and probably high margin) product as fast as they could while shipping almost 2 million units and costs seemed to suffer. They said that the problem was fixed for the most part and margins should be going back to normal pretty soon. I think the "two quarters of cost issues" part above didn't jive with the "manufacturing problems fixed" part and the stock nose dived because of it.

It just seems strange that increasing headcount for R&D purposes, M&A costs (from a company that allows them to bring their physics engine in-house,) people being off less (and thus working more,) and having a manufacturing problem that was supposedly "fixed" could drop the stock 18% after they said Q1 revenue would be "better then seasonal" ie better then the normal 5% drop from Q4 to Q1. In any case the stock seems pretty cheap right here at a forward P/E of only 12 and a PEG of less then 1.