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Nvidia Shares Fall on Worries of Capacity Constraints

Shares of Nvidia fell sharply Friday, after an analyst said investors should take profits from a recent runup in stock of the graphics chip maker, and noted a low implied revenue guidance for the third quarter.

Nvidia shares were recently trading down $4.20, or 9.1%, at $41.93.

The company on Thursday beat analyst estimates with second-quarter profit and sales and announced a three-for-two stock split, to take place Sept. 10.

Stifel Nicolaus analyst W. Blake Fischer, in a client note, cut the stock's rating to "Sell" from "Hold." The analyst noted shares have climbed 60 percent since late March, and said near-term expectations for the company are a bit too high.

"We believe below-seasonal guidance coupled with the impact of tightening capacity, limited inventory, building competitive pressures, and rising DRAM prices could drive investors to reassess the potential for further upside performance in the near to intermediate term," wrote Fischer. DRAM refers to dynamic random access memory.

"Taking this into account, and given its premium valuation to its peers, we recommend investors take this opportunity to lock in gains from the recent run in the shares," added Fischer.

The company in a conference call said it expects third-quarter revenue to grow between 5 percent and 7 percent. Using year-ago revenue of $754.9 million, that implies current quarter revenue between $792.7 million and $807.8 million.

Analysts polled by Thomson Financial are looking for higher quarterly revenue of $946 million from the company.

In the conference call, the company also noted its manufacturing is a bit limited and said its inventories are low. Citigroup analyst Glen Yeung said that means it's not certain that Nvidia will be able to meet demand if strong orders appear late in the quarter. He kept a "Hold" rating on shares.

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