Earnings Scorecard: NVIDIA Corp. (NVDA)

Since the company reported results on August 12, there have been a large number of estimate revisions by the analysts covering the stock.

First Quarter Highlights

NVIDIA Corp. (NVDA) reported its second-quarter fiscal 2011 earnings per share (EPS) of 3 cents, which was well below the Zacks Consensus Estimate of 11 cents. Total revenue came in at $811.2 million, also below the Zacks Consensus Estimate of $838.0 million.
NVIDIA generated its second quarter revenues of $811.2 million, down 19.0% from the previous quarter but up 4.5% from the year-ago quarter. The company generated decent numbers from Quadro professional graphics, Tesla GPU computing and the Tegra system-on-a-chip business. On the other hand, the GeForce consumer business fell below the company’s expectations, as a result of weak PC demand in Europe and China .

Revenues from the GPU business plunged 29.5% from the prior quarter. The company expects the segment to post market share gains, although not in the foreseeable future. This apart, Quadro professional solutions and Tesla computing solutions contributed about 26.5% to total revenue, and moved up by 13.4% over the prior quarter. The consumer line of business moved up 46.5% year over year, attributable to an increase in the Tegra line of business.

Agreement of Analysts

The company expects third-quarter revenues to increase by approximately 3.0% to 5.0% sequentially. Gross margin is expected to be in the range of 46.5% to 47.5%, while operating expenses are expected to be approximately $300.0 million.

Over the last 30 days, 27 of the 30 analysts covering the stock reduced their estimates for the third quarter, with no analyst making an upward revision. Moreover, analysts also revised their estimates for fiscal 2011, with 25 of the 27 analysts reducing estimates, and no analyst moving in the opposite direction.

Management projected its third quarter revenue growth of 3% – 5% on a sequential basis, which disappointed some analysts. Moreover, it was felt that although the company has a history of strong growth following periods of substantial revenue decline, the current softness in orders significantly reduced visibility. Therefore, a recurrence of historical performance was unlikely, at least in the near term.

Some other analysts are of the opinion that the company’s inventory days have grown by 15 in the last quarter to 80, well over the company’s historical average of 70 days. Some analysts expect inventory levels to rise substantially, touching 90 days in the third quarter, which is expected to have a downward pressure on margins in the upcoming quarter. The analysts are also concerned about additional charges to be incurred by NVIDIA for replacing defective products.

Apart from gaming, NVIDIA is focusing on computing, which is becoming increasingly visual, which we believe is a step in the right direction. Software increasingly relies on visual user interface rather than text. For instance, Windows Vista requires much more graphics resources than its predecessor, as it leverages improved graphics capabilities to enhance user experience. This will subsequently boost the demand for graphics cards.

Magnitude

The third quarter Zacks Consensus Estimate for EPS has moved down to 14 cents, almost 10 cents below the EPS estimated 30 days ago. For fiscal 2011, the Zacks Consensus Estimate for EPS has moved to 58 cents, down 37 cents from the EPS estimated 30 days ago.

Our Recommendation

The company has reported mediocre second quarter numbers, which fell short of expectations. However, the longer-term growth prospects for the graphics chip market remains very strong in our opinion. We continue to believe that graphics chips will influence the way computing devices, such as PCs and laptops function, which will further increase demand for them. Despite near-term hiccups, the company continues to introduce new products at regular intervals and attracting additional customers. Moreover, it seems that the long drawn legal battle against Intel Inc. (INTC) is expected to move in favor of NVIDIA.

On the other hand, performance will likely be tempered by cyclical weakness, exposure to Europe and increased competition. Additionally, increasing inventory levels may put some pressure on margins, going forward.

We have a Neutral rating on NVIDIA, with a short-term Zacks #4 Rank (Sell).

NVIDIA CORP (NVDA): Free Stock Analysis Report

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