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Will NVIDIA’s Second Quarter Be A Mixed Bag?

August 06, 2014 | About:

After kick-starting the year with strong growth in the top and bottom line in the first quarter, gaming chip-maker NVIDIA (NASDAQ:NVDA) is slated to release its second-quarter 2015 results on August 7. Improvement in the last quarter was driven by higher demand for its PC gaming processors and Tegra mobile processors. The company expects some seasonal weakness in graphic processing unit (GPU) chips (targeting notebooks) demand that could affect the current quarter’s results. Let’s find out what to expect from NVIDIA in the second quarter.

Revenue Could Grow

In the first quarter, revenue grew 16% year over year to $1.1 billion, and it seems that the analysts expect more double-digit growth in the second quarter. The analysts forecast revenue to grow 12.6% to $1.1 billion in the second quarter over last year. This is falling within the company’s forecast range of $1.078-$1.122 billion. But the rate of improvement is lower than the prior quarter, which could be due to anticipated seasonal weakness in graphic chip demand. Sequentially, revenue would remain flat, suggesting a better picture compared with the first quarter when the company recorded a sequential decline of 4%.

The first quarter revenue growth was triggered by higher demand for graphic processing chips from PC gaming, data center and cloud end markets. During the quarter, NVIDIA launched the refreshed version of its GPU chip GEForce GTX 800M series for the PC gamers. It also announced the availability of its cloud-based GPU technology ‘GRID’ through VMware’s (NYSE:VMW) Horizon DaaS (Desktop-as-a-Service) Platform. The joint product will enrich users’ graphic experience in a virtualized desktop ecosystem.

The company also mentioned that its GRID chips are being evaluated by roughly 600 enterprises globally, which signals that further contribution from the product is under way. On the data center front, NVIDIA’s chips are being used by tech stalwarts like IBM (NYSE:IBM), Dell, and Hewlett-Packard (NYSE:HPQ) in their respective high-end servers. If the demand in PC gaming, data center and cloud end-markets continues to remain strong, the new developments in the areas could fetch higher revenue. The company also launched the GEForce GTX TITAN Z during the second quarter, but it’s hard to gauge the revenue contribution so early.

NVIDIA also witnessed revenue growth from its mobile processor chip Tegra for the third straight quarter, particularly from the automobile sector. With customers like Google (NASDAQ:GOOG) and Chinese mobile maker Xiaomi, it’s expected that revenue from Tegra could soar this quarter, too.

Source: NVIDIA 10K

Better Profitability if Compared with Year-ago Level

NVIDIA has thrown positive surprises in three of the last four consecutive quarters, blowing past expectations. Even in the only quarter (third-quarter 2014) when it did not beat estimates, it matched analysts’ expectations. The company didn’t forecast any specific earnings number, but analysts’ expectation of $0.20 per share suggests a 25% year over year appreciation while a sequential decline of 16.7%.

The sequential decline in EPS could be understood from the company’s non-GAAP gross margin expectation of 54%, down from 55.1%. With no sequential revenue growth expected, lower gross margin reflects unfavorable product mix – i.e., lower volume of high-margin products. Also, operating expenses in the second quarter are expected to be $414 million, up from $410.8 million in the prior quarter.

NVIDIA’s balance sheet is debt-laden and as a result has to bear huge interest expense, which is a drag on its profitability. But the company’s continuous share buyback program could provide some cushion.

Parting Thoughts

Although the PC market remains challenging, NVIDIA’s prospects look fabulous with its growing exposure in cloud and data center spaces. But only revenue growth may not be sufficient; improvement in profitability is equally essential for which the company may have to undertake effective cost reduction measures and reduce dependence on debt to curb interest expenses. As of now, let’s keep a close watch on the company and wait for the result update.

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