Beware This Stock Market Favorite

Although shares of chipmaker NVIDIA are soaring--up 175% this year--and hype around the stock is over the top, insiders have been selling

At Taco Bell, the only thing I ever liked was Dinky the chihuahua, star of the Mexican fast-food chain's television ads. Then, suddenly last summer, he got fired. So why was I lurking the other day at a Satellite Beach (Fla.) Taco Bell? Looking for X. That's X as in Xbox, the video-game player that Microsoft (MSFT ) is set to roll out this fall with a gordita-sized marketing budget and promotional hoopla at Taco Bell.

No sign of Xbox there yet. Where you can't miss it, though, is all around NVIDIA (NVDA ), today's hottest maker of semiconductors and, as it happens, supplier of two key Xbox chips. While most chip stocks are sagging, NVIDIA is soaring, up 175% this year, to new highs over $94 (chart). Xbox anticipation isn't all that's fueling NVIDIA's ascent. "It's the king of graphics" chips, says Manoj Nadkarni, principal analyst at, a site that tracks chip companies. "They have practically driven the competitors out of business." The company's chips are turning up in a wide variety of PCs and workstations. Sales rose 96%, to $735 million, in the fiscal year ended on Jan. 28. Profit grew 162%, to $100 million. And with earnings per share seen rising 35% or so this year and next, NVIDIA right now may just be Wall Street brokers' favorite technology stock.

If you ask me, it's also the most dangerous. Ranked No. 4 in BusinessWeek's latest Info Tech 100, NVIDIA is a solid citizen of Silicon Valley. And against some steep odds, including the impending launch by Nintendo (NTDOY ) of its new GameCube, Xbox may oust Sony's (SNE ) PlayStation2 as kids' No. 1 gotta-have. But if you simply look at the hype around NVIDIA stock, along with who owns it and who has been selling it, you'll see that buying NVIDIA right now is a risk that even little Dinky, who once confronted Godzilla, wouldn't dare to run.

You can get a sense of the passions NVIDIA is inciting by checking the investor message board devoted to it at Yahoo! (YHOO ) From 6 a.m. to 6 p.m. on May 1, for example, ticker symbol NVDA drew 379 posts, or one every other minute, such as this one from "marketsavant": "NVDA IS EXCITING. I love NVDA. An Extraordinarily Wonderful Trading Vehicle...! It's ECSTASY!" Day traders dig this stock because its "float"--the shares available to trade freely--is small next to its trading volume. Lately, 13% of its float is turning over on an average day. That's double the turnover in (AMZN ), and all of that trading has been sending the price on some wild swings. On May 1, with no substantial news, NVIDIA traded from $82.25 to $91.30 a share.

BIG STAKES. Day traders are by no means the only investors that are high on NVIDIA. The biggest single stockholder, Fidelity Investments, which holds more than 10 million shares, has a stake of almost 15%. Likewise, Janus Capital owns 4.7 million shares, or nearly 7%. While in one way that amounts to two big votes of confidence in NVIDIA, what it also tells me is this: Having loaded up on the stock at lower prices, the next trades these fund giants make will be sales.

Trimming is a portfolio strategy that NVIDIA's other major stockholders--the insiders--already are pursuing with increasing speed. A company spokesman told me that the insiders' sales of stock aren't related to NVIDIA's business outlook. They're just part of an orderly diversification plan. Perhaps, but as the stock soared this year, so did insider sales. All told, eight NVIDIA insiders last year sold about 1.4 million shares, none of them in the fourth quarter as the stock slid 60%. In this year's first quarter, as the stock leaped 98%, six insiders dumped about 620,000 shares.

What's wrong with this? Nothing, really. I would do the same thing if I owned a risky stock that was trading at nearly 9 times sales and 93 times cash flow--no matter how bright the company's future. Even if Wall Street's bulls happen to be right and NVIDIA this year earns the consensus estimate of $1.73 a share, a buyer of the stock today will be paying 50 times this year's earnings.

Can NVIDIA still climb? With its limited float and the ecstatic attentions of day traders, sure. "NVDA will be above 100 by next week," says one recent posting on Yahoo! "No doubt about it." That might reassure some prospective investors, those who want to take their investing cues from an anonymous adviser whose screen name happens to be "the_retarded_optimist."

By Robert Barker

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