Is the Street Writing NVIDIA Off?

It's hard to fault anyone for feeling a bit apprehensive about NVIDIA's (NASDAQ: NVDA  ) future. While this company still has a solid market position in graphics processor units, or GPUs, over rivals Advanced Micro Devices (NYSE: AMD  ) and Intel (NASDAQ: INTC  ) , evidence suggests that this may not last. But it's not for the reasons that you think.

For instance, in their respective quarterly performances, shipments of AMD GPU/CPUs dropped 15% year over year in the fourth quarter. By comparison, revenue from Intel's PC client group was down 6% year over year and 1.5% sequentially. Meanwhile, NVIDIA's desktop shipments spiked up 28.3% from the previous quarter, while mobile discrete shipments advanced 12%.

Remarkably, in a down market, NVIDIA's overall PC graphics shipments soared roughly 20%. This is while AMD struggled with weak microprocessor shipments that lead to a 37% year-over-year decline in revenue. Despite this outperformance by NVIDIA, the Street remains unimpressed. That the success of its business is heavily predicated on PC sales makes it hard to generate any sort of optimism. The fact is, PCs are still dying and NVIDIA understands this.

To that end, the company has been working hard to transform itself from just a legacy PC supplier to company entrenched in the new era of mobile devices. Unfortunately, the Street has not been buying this story. Bears argue that NVIDIA is too far behind the likes of Qualcomm. Though this might be true today, NVIDIA's recent numbers suggest that this deficit is anything but insurmountable.

With fourth-quarter earnings due out Wednesday, the company will take the stage to explain to investors why they should believe in this story and why NVIDIA deserves more time. The company needs to build upon an impressive Q3, during which it beat both top and bottom line estimates, and culminate its fiscal year on a solid note.

Granted, NVIDIA's third quarter wasn't Qualcomm-esque, but it significantly outperformed Texas Instruments (NASDAQ: TXN  ) , which is trading at a P/E ratio that is 7 points higher. Meanwhile, Texas Instruments is going through the same restructuring efforts as NVIDIA and trying to prove it can grow without mobile. However, its recent efforts have resulted in declining revenue for five consecutive quarters.

Nevertheless, despite sales arriving down 12% sequentially and 13% year over year, the Street believes in Texas Instruments. Conversely, NVIDIA is growing market share amid much doom and gloom, and the Street does not care. Fairly or unfairly, this is NVIDIA's reality. And the company has done this as sales of its Tegra line of chips have seen increased demand, which was exactly what investors were apprehensive about.

However, I'm inclined to think that the stream of bearishness is more about fears from the competition and less about NVIDIA's ability to execute. Clearly, the company has not been hurt by rising inventories -- as Intel and AMD experienced -- and hurting gross margins. So, NVIDIA knows what it is up against. And its new mobile strategy based on its Tegra chips, which integrate many of the features of the ARM architecture, seems to be working pretty well. But will it be enough?

What the company reports this afternoon after market close will answer this question, at least in the near term. Analysts are expecting earnings of $0.23 per share on revenue of $1.1 billion. This would represent EPS growth of 9.5% and 15.4% growth in revenue. It's worth noting here that NVIDIA has increased revenue for two consecutive quarters, including 13% in Q3. For a company that has to be great just to be good, it needs to reach the high end of its guidance range for the stock to rally.

Speaking of which, I think these shares are worth a gamble here for the long term. There's very little expected when compared to Qualcomm and even Texas Instruments. At current levels, I think the risk-reward trade-off favors NVIDIA, even more than Intel. And it is not unrealistic to expect fair value to reach $15 to $18 over the next 12 to 16 months.

NVIDIA was ahead of the curve launching its mobile Tegra processor, but investing gains haven't followed as expected, with the company struggling to gain momentum in the smartphone market. The Motley Fool's brand-new premium report examines NVIDIA's stumbling blocks, but also homes in on opportunities that many investors are overlooking. We'll help you sort fact from fiction to determine whether NVIDIA is a buy at today's prices. Simply click here now to unlock your copy of this comprehensive report.


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