NVIDIA Corporation (NVDA) is scheduled to announce its third quarter 2011 results on November 12, 2010, and the two way revisions in estimates reflects mixed sentiment on the stock.
Second Quarter Overview
NVIDIA reported second quarter 2011 numbers, with earnings per share of 3 cents down from the year-ago quarter, although below the Zacks Consensus Estimate of 11 cents.
NVIDIA delivered revenues of $811.2 million, down 19.0% from the previous quarter but up 4.5% from the year-ago quarter. While the Quadro professional graphics, Tesla GPU computing, and Tegra system-on-a-chip product lines did well, the GeForce consumer business disappointed, as a result of weak PC demand in Europe and China.
Gross margin on a GAAP basis was 16.6%, down from 45.6% in the previous quarter and 20.2% in the year-earlier quarter. Gross margin was hurt by a net charge of $193.3 million related to weak die or packaging material set.
The temporary slowdown in the company’s consumer GPU business resulted in excess inventory of certain older generation products. As a result, second-quarter results included charges related to the large inventory write-down.
Agreement of Analysts
Out of the 28 analysts providing estimates for the third quarter, 1 has lowered his or her estimate in the last thirty days, while there was no upward revision. Out of the 27 analysts tracking the stock for fiscal 2011, 3 analysts raised their estimates in the last thirty days, while one moved in the opposite direction.
Some analysts are of the opinion that NVIDIA is likely to face increased competitive pressure from Intel (INTC) and Advanced Micro Devices Inc. (AMD) in its chipset and discrete GPU businesses. The analysts are concerned about the fact that NVIDIA could lose market share in core GPU products due to aggressive pricing by both AMD and Intel.
The analysts are also of the opinion, that NVIDIA inventory level is high for its GPU products. This can be credited to weakening of demand specifically in the company’s European and Chinese territories. We believe demand in this segment will take some time to pick up, which may rationalize total sales to some extent.
Apart from gaming, NVIDIA is focused on computing, which is becoming increasingly visual. We believe this focus is a step in the right direction. Software increasingly relies on visual user interface rather than text.
For instance, Windows Vista by Microsoft Corp. (MSFT) requires 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 of Estimate Revisions
The magnitude of revisions has also been minimal since the company reported its second quarter results. Overall, estimates for the upcoming quarter have gone down from 15 cents ninety days ago to 14 cents, while the estimate remained constant over the last thirty days.
For fiscal 2011, estimates have gone down from 15 cents ninety days ago to 14 cents. Over the past thirty days, estimates have remained unchanged. For 2012, estimates have gone down from 74 cents ninety days ago to 68 cents, with no changes in estimates over the last thirty days.
Recommendation
The company reported mediocre second quarter numbers, falling short of expectation. However, better cost management, slow revival in demand for graphics chips, and an improvement in PC and laptop sales are positives.
On the other hand, performance will likely be tempered by cyclical weakness, exposure to Europe and increased competition. This apart, increasing Research & Development expenses may put some pressure on margins going forward, while a pickup in demand in the GPU segment will take time.
NVIDIA currently has a Zacks #3 Rank (short-term Hold).
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