Numbers Up, Stock Down at NVIDIA

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To judge from NVIDIA's (Nasdaq: NVDA) stock price, you'd almost think the company forgot to post its earnings as promised on Thursday. You'd certainly never guess that the 1.3% downtick was connected to a report of "record high" revenue, gross margin, and quarterly profits -- which, by the way, beat estimates.

Even less explicable was the 9% haircut NVIDIA endured yesterday, as part of a downturn in the semiconductor industry: Texas Instruments (NYSE: TXN) dropped 1%, Silicon Labs (Nasdaq: SLAB) fell 2%, AMD (NYSE: AMD) slid 3%, and Broadcom (Nasdaq: BRCM) and SanDisk (Nasdaq: SNDK) each shed 4%. However, the industry has recovered somewhat, with NVIDIA gaining 5% so far today.

Yet NVIDIA's third-quarter results were superb. Sales grew 36% year over year, and the margin improvements touted in the press release's headline helped the company translate that sales growth into 121% better profits than it earned a year ago, $0.38 per share in all. Operating margins year to date ran to 19.8%, a 540-basis-point improvement over its performance in the first three quarters of 2006. That puts NVIDIA within spitting distance of Intel, in terms of margins, and way, way, way ahead of unprofitable rival AMD.

As for guidance, well, NVIDIA hardly mentioned it in its earnings release. Instead, management revealed its guidance in the post-earnings conference call -- which few ordinary investors have the time or patience to monitor. Thus, only the professional analysts, who get paid to sit through these things, learned that NVIDIA predicted 5% to 7% sales growth, stable gross margins, and a rise in operating costs from 3% to 5% for the fourth quarter.

Although management didn't specify, I'm guessing it was referring to sequential changes in those percentages. Assuming that's correct, we're looking at about 46.2% gross margins on about $1.2 billion, and about $275 million in operating profits. If it's taxed at the predicted rate, it should give us per-diluted-share profits of about $0.39 per share, a figure that falls in the middle of the analysts' estimated range of $0.32 to $0.48 per share.

Aha! There's the culprit!
Getting back to the question of the day: Why exactly did NVIDIA lose $1.8 billion in market cap yesterday? I think we see a hint in that the one chip stock to rise yesterday was Intel (Nasdaq: INTC). And Intel, you see, announced the rollout of a new, smaller, faster, more energy-efficient chip that may herald market share-theft from yesterday's losers. That Intel's new chip is described as being "geared to PCs, including high-end desktop computers used by high-end gamers" appears to directly target gamer-loving NVIDIA.

That's my theory, at least. To learn what the stock investigators at Motley Fool Stock Advisor think about their recommendation's recent performance, pick yourself up a free trial to the service and review our analysts' latest updates.