NVIDIA Corporation (NVDA) is scheduled to announce its second quarter 2011 results on August 12, 2010 and the substantial downward revision in estimates reflect the negative bias that analysts have on this stock.
First Quarter Overview
The company reported encouraging first quarter 2011 numbers, with EPS of 23 cents exceeding the Zacks Consensus Estimate of 22 cents, although earnings declined compared to the year-ago quarter.
NVIDIA delivered revenues of $1.0 billion, up 51.0% from the year-ago quarter, driven by improvement in the company’s GPU and professional solutions business segment, although decline in the consumer business segment tempered revenue growth.
NVIDIA shipped a few hundred thousand units of its products during the quarter, which exceeded management’s prior expectations. The GTX 480 and 470 series of products continued to generate solid demand across geographies.
This apart, the company’s core GPU business remained almost flat sequentially. Results were impacted by negative seasonality in the mainstream desktop GPU business, offset to a considerable extent by the newly launched Fermi-based GeForce GTX470/480 effect GPUs and the GeForce GT320M chipset, as well as the strong demand for notebooks.
The gross margin also improved to 45.6% from 44.7% reported in the previous quarter. Gross margin improved sequentially as a result of the launch of the Fermi-based GPUs and were helped by growth in Professional Solutions, where the workstation and computing businesses generated margins that exceeded the overall corporate average.
Agreement of Analysts
Out of the 28 analysts providing estimates for the second quarter, 20 have lowered their estimates in the last thirty days, while there was only one upward revision. Out of the 28 analysts tracking the stock for fiscal year 2011, 23 analysts have revised estimates downwards in the last thirty days and there was no movement in the opposite direction.
The substantial number of downward revisions was due to the difficulties expected to be faced by NVIDIA over the next 6−9 months due to cyclical weakness in the chipsets and core GPU segment, exacerbated by the macroeconomic weakness. Some analysts also stated that Tesla and Tegra platforms not gain momentum until the second half of calendar year 2011, at which time there will be a positive impact on margins.
This apart, some other analysts believe that NVIDIA is likely to be up against increased competitive pressure from Intel and AMD in its chipset and discrete GPU businesses. Analysts are in fact concerned about the fact that NVIDIA could lose market share in core GPU products due to AMD/ATI’s aggressive pricing on the one hand and Intel on the other.
Magnitude of Estimate Revisions
The magnitude of revisions has also been minimal since the company reported its first quarter results. Overall, estimates for the upcoming quarter have gone down from 22 cents ninety days ago to 13 cents currently, with a decline of 7 cents in the Zacks Consensus estimate over the past thirty days.
For fiscal year 2011, estimates have gone down from 95 cents ninety days ago to 69 cents currently. Over the past thirty days, estimates have declined by 26 cents. For 2012, estimates have gone down from $1.06 ninety days ago to 76 cents currently, with estimates moving down by 29 cents over the last thirty days.
The company reported decent first quarter numbers, and is expected to grow in the long run through improved cost management and gradual recovery in demand for graphics chips. However, this performance will likely be tempered by cyclical weakness, economic slowdown, exposure to Europe and increased competition.
Additionally, increasing investment in R&D coupled with a slow recovery in the GPU market will exert some pressure on margins over the next few quarters.
We have a long-term Underperform rating on NVIDIA, with a short-term Zacks #5 Rank (Strong Sell).