Shares of Nvidia suffered their worst one-day loss in more than three years Thursday, a day after the graphics chipmaker reported the first weakening of gross margin in 13 quarters and concerns mounted over competitive risks from rivals ATI and Intel.
The decline brought the stock down to levels not seen in a month after a steady run-up to the fourth-quarter earnings report Wednesday after U.S. markets closed.
Nvidia shares declined $3.48, or 13 percent, to $23.54 on Nasdaq, where it was among the most active issues.
While the company -- which competes against ATI, a graphics chipmaker now owned by Advanced Micro Devices and increasingly against Intel , which is moving aggressively into graphics chips -- gave a better-than-expected revenue forecast, operating expenses were up more than expected.
"The revenue guidance was better than expected, but the issue is operating expenses are going to be much higher than expected," said Stiefel Nichlas analyst Blake Fischer. "The company has been in the past very adamant on their ability to leverage gross margin, and Nvidia has now started to back away from that a bit."
Fischer has a "sell" rating on Nvidia shares, which he issued in August, when the shares were trading around $30.
Gross margin -- the percentage of revenue left after subtracting product costs -- narrowed to 45.9 percent in the fourth quarter from 46.4 percent in the prior period.
Nvidia Chief Executive Jen-Hsun Huang said on a Wednesday conference call after the quarterly report that a manufacturing problem on one of its graphics chips added to costs, but said the issue was resolved.
"It admitted to a manufacturing error that caused a spike in costs, but asserted that it was behind them and this would allow for a cost improvement in the current quarter," wrote FTN Midwest analyst JoAnne Feeney in a note to clients.
On Wednesday, Nvidia reported a 57 percent increase in net income on the back of a 37 percent gain in revenue.
"In the last three years, they were pretty much untouchable," Fischer said. "They were taking a lot of share, but now people are realizing that ATI is a real competitor again and could regain market share."
Also Thursday, brokerages Needham and BMO cut price targets on Nvidia shares. Needham trimmed its target to $39 from $41, and BMO reduced its target to $33.50 from $44.
In the last 12 months, based on Wednesday's closing price, Nvidia shares rose 19 percent, compared with a 21 percent decline in the Philadelphia Semiconductor Index .
The stock had been insulated, analysts said, by its ability to gain market share and increase its competitive lead over ATI. However, with a resurgent ATI and a looming Intel, the buffer that Nvidia enjoyed has diminished.
"Now they're much more sensitive to the demand trends we see in the overall PC market," Fischer said.