Foolish Forecast: Embattled NVIDIA

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Embattled semiconductor maker NVIDIA (Nasdaq: NVDA) eked out a "win" over Wall Street last quarter -- if you can call "beating by a penny" a win, and ignore the company's 62% drop in non-GAAP profit year over year. NVIDIA is set to report fiscal Q3 2009 earnings tomorrow, and while it may "win" again, I'm not sure how many more Pyrrhic victories it can take.

What analysts say:

• Buy, sell, or waffle? Twenty-seven analysts give NVIDIA 12 buy ratings, 14 holds, and one sell.
• Revenue. They expect to see sales slide 20% to $892.4 million.
• Earnings. Profits are predicted to plummet 73% to $0.12 per share.

What management says:
The company enjoyed good news on the litigation front this quarter. In September, NVIDIA announced the settlement of a class action lawsuit involving itself and Advanced Micro Devices (NYSE: AMD) for a token $850,000. Last month, NVIDIA confirmed that a Department of Justice antitrust investigation, possibly related, had been closed, with no adverse consequences for NVIDIA. In addition, the company appears to be putting to bed a pair of class action lawsuits concerning its historical stock-option practices. No word yet on how much those two will cost.

What management does:
None of this will do any good for NVIDIA's margins, of course. Even token settlements will bite into profit margins badly weakened by last quarter's devastating writedowns.

Margins	4/07	7/07	10/07	1/08	4/08	7/08
Gross	43.1%	43.8%	45.2%	45.6%	45.5%	39.6%
Operating	15.3%	16.7%	18.9%	20.4%	20.4%	12.8%
Net	15.1%	16.5%	18.7%	19.5%	19.1%	12.6%

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:
Focusing on the big picture, though, NVIDIA seems to be cleaning up its messes, both in court and on the manufacturing line. In the short term, these moves cost money and margins and make the company look a whole lot less profitable than it has been in the past. (I firmly believe it will regain those profits.)

Today, NVIDIA sits near the back of the pack of the semiconductor industry, with everyone from Intel (Nasdaq: INTC) to Texas Instruments (NYSE: TXN) to Qualcomm (Nasdaq: QCOM) mocking its margins. But as one of the two big players in computer graphics chips, I honestly don't see how this situation can last for long. Perhaps not even as long as tomorrow.

Still can't envision NVIDIA's problems? Try these articles:

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