Foolish Forecast: Envisioning NVIDIA

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"And so it was that, on the day before Independence Day, NVIDIA (Nasdaq: NVDA) investors declared their independence from any chance of profiting on their stock this year."

Was I right or was I wrong when I penned these words last month, just days after NVIDIA's explosive news of a double-digit sales shortfall combined with a nine-figure earnings writedown? We'll find out tomorrow, when this Motley Fool Stock Advisor recommendation files its fiscal Q2 2009 report after close of trading.

What analysts say:

• Buy, sell, or waffle? Twenty-seven analysts give NVIDIA 15 buy ratings and a dozen holds.
• Revenue. They expect to see sales slip 3% to $908 million.
• Earnings. Profits are predicted to plummet 65% to $0.12 per share.

What management says:
In case you missed the news that torpedoed NVIDIA last month, here's a rundown: NVIDIA is taking a $150 million to $200 million charge "to cover anticipated customer warranty ... and other ... costs ... arising from a weak die/packaging material set in certain ... MCP and GPU products used in notebook systems." This charge will exacerbate gross margin and sales weakness blamed on "end-market weakness," "delayed ramp of a next generation MCP," and price competition. NVIDIA's latest Q2 sales estimates bracket analysts' estimates, ranging from $875 million to $950 million.

What management does:
All of which adds up to the inescapable conclusion: Tomorrow's news is going to be a big change from what we've come to expect from NVIDIA. Quarter after quarter, the company had been widening its margins, until last quarter, when they slipped only a little. Tomorrow, they could slip a lot.

Margins	1/07	4/07	7/07	10/07	1/08	4/08
Gross	42.4%	43.1%	43.8%	45.2%	45.6%	45.5%
Operating	14.8%	15.3%	16.7%	18.9%	20.4%	20.4%
Net	14.6%	15.1%	16.5%	18.7%	19.5%	19.1%

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:
Yet even if things turn out as badly as feared, make sure to view the news in context. NVIDIA remains profitable even as archrival AMD (NYSE: AMD) is not. It lags Intel (Nasdaq: INTC) by only a few percentage points' worth of gross margins, while its own 20% margins (while they last) are objectively enormous.  

And NVIDIA's market presence is widespread. You'll find NVIDIA chips in computers from Apple (Nasdaq: AAPL), Sony (NYSE: SNE), Dell (Nasdaq: DELL), and Hewlett-Packard (NYSE: HPQ). Sure, NVIDIA's short-term troubles are disappointing, but unless management tells us tomorrow that its long-term prospects have been ruined, this stock cannot help but rise again. Eventually.

Still having trouble envisioning NVIDIA's problems? These articles may help:

• Fearful Stocks for Greedy Investors
• NVIDIA Explodes