Foolish Forecast: Enter NVIDIA

For four straight quarters, graphics chipmaker NVIDIA (Nasdaq: NVDA  ) has made Wall Street's Wise Men look the fool, beating their earnings predictions with a stick. But as we discussed late last month, one analyst expects NVIDIA to finally get its comeuppance, and soon. How soon? We'll find out when the company reports fiscal Q3 2008 earnings on Thursday.

What analysts say:

  • Buy, sell, or waffle? Twenty-seven analysts play NVIDIA, and 14 of them rate it a buy. As for the rest, they give the stock 11 hold ratings and two sells.
  • Revenues. On average, the analysts expect to see 23% sales growth to $1.01 billion.
  • Earnings. Profits are predicted fly even higher, up 38% to $0.36 per share.

What management says:
No news was great news at NVIDIA this quarter. On Oct. 26, the company announced that the SEC has terminated its investigation into alleged stock-option backdating at the company, and will be levying no penalties. That was about it for recent 8-K filings.

Peering back three months, CEO Jen-Hsun Huang boasted of "record revenue, record gross margin, and record net income" in calling Q2 an "outstanding quarter." Then peering forward, Huang opined: "As the leading and only dedicated [graphics processing unit, or GPU] company in the world, our opportunity has never been more exciting as the number of applications and digital devices that benefit from the GPU continues to grow." As fellow Fool Anders Bylund observed when describing last quarter's report, this may have been a jab at everyone from ATI (bought by AMD (NYSE: AMD  ) ) to Intel (Nasdaq: INTC  ) , which competes with NVIDIA in graphics, to STMicro (NYSE: STM  ) , which has dropped out of the graphics game.

What management does:
Specialization suits NVIDIA well. At every margin level -- gross, operating, and net -- profitability has been growing steadily.

Margins

4/06

7/06

10/06

1/07

4/07

7/07

Gross

40.1%

41.2%

41.4%

42.9%

43.6%

44.3%

Operating

15.2%

15.3%

15.1%

15.8%

16.2%

17.6%

Net

13.2%

13.2%

13.6%

14.6%

15.1%

16.5%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Curiously, NVIDIA's success contributed to the downgrade that we discussed last month. According to CAPS standout analyst AmTech, NVIDIA peaked several months ago. With competition now ramping up at AMD (which has apparently worked out the kinks in its ATI acquisition), AmTech says NVIDIA is already in decline -- an opinion that very few analysts seem to share, judging from the revenue and profits growth estimates shown above.

Meanwhile, the stock has already delivered a four-bagger to our subscribers at Motley Fool Stock Advisor. Fool co-founder David Gardner, who recommended the stock, is now taking the middle road on NVIDIA, though. Updating Stock Advisor members on his thoughts in July (about the same time AmTech says the company's decline began), David mentioned that he saw "no immediate new catalysts to drive the price higher." But if AmTech is mistaken and NVIDIA keeps on growing gangbusters with both sales and margins, then who needs catalysts?


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