At first glance, NVIDIA's (NVDA 3.71%) recent earnings release doesn't look all that great. Both revenue and earnings fell year-over-year, and the outlook for the fourth quarter came in below expectations. With competitor AMD (AMD 1.33%) releasing new graphics cards last month, forcing NVIDIA to cut prices, concerns regarding the future are certainly warranted.

But, NVIDIA's quarter was actually a lot stronger than it appears. The conference call hosted by the company after the earnings release shed some light on the state of the business, revealing that NVIDIA is in better shape than ever.

The PC gaming boom
While the overall PC market is in decline, the PC gaming market is growing. Worldwide, PC gaming makes up nearly 40% of the total gaming market, larger than the console gaming market. The decision by all of the major game console makers to use AMD graphics chips, while certainly a positive for AMD, is not really a negative for NVIDIA.

While the total GPU business declined by 2% year-over-year, the gaming segment grew by 6%. Most of the lost revenue came from low-margin products, allowing NVIDIA to improve its gross margin compared to the same period last year. The recent release of the GeForce GTX 780 Ti helped NVIDIA reclaim the fastest GPU crown, and these high-priced cards carry the highest margins for the company.

AMD made big news when it launched its R9 series of graphics cards in October. The pricing was aggressive, and the high-end R290X proved to be more powerful than NVIDIA's fastest offering at the time for a much lower price. Along with the new cards, the company also introduced a new graphics API called Mantle. Mantle allows for game developers to have more direct access to the graphics hardware, theoretically allowing for improved performance.

NVIDIA's price cuts take away much of AMD's short-lived price advantage. The GTX Titan, the NVIDIA card which AMD's new high-end card beat in terms of performance, launched in February. The fact that it took eight months for AMD to fight back is not encouraging, and I expect NVIDIA to stay one step ahead of AMD.

The growing enterprise business
NVIDIA doesn't just focus on gaming. The company has a dominant share of the professional graphics market with its Quadro line of GPUs, a segment that grew by 24% year-over-year. During the quarter, NVIDIA released the Quadro K6000, the fastest workstation graphics card to date.

The Tesla line of GPUs are aimed at high-performance computing applications, and the cards allow for applications to achieve a significant performance boost. Many of today's supercomputers feature Tesla processors, and the segment has grown by 43% year-to-date.

GRID, the newest enterprise product from NVIDIA, is a line of graphics cards that support virtualization, allowing for graphics-heavy applications to be run in both a virtual desktop environment and in the cloud. Companies like Cisco, Dell, HP, and IBM are all selling GRID servers, and Amazon recently expanded its web services product by launching a GRID-powered instance.

Going forward, GRID could end up being the main growth driver for NVIDIA, with explosive growth expected. On the company's conference call, CEO Jen-Hsun Huang stated:

...this is the first time that we have been in a sweet spot of enterprise computing and had the benefit of the sales force of every major OEM in the world supporting its launch, from Cisco to Dell to HP to IBM, Fujitsu, Hitachi. I don't know any global enterprise IT company who isn't supporting GRID and taking it to market.

GRID has plenty of potential, and the support of every major IT company doesn't hurt.

The mobile payoff
This year was one of transition for NVIDIA's mobile business. The Tegra 4 was delayed to speed certification of the Tegra 4i, which includes an LTE modem. This caused a gap between the wind-down of Tegra 3 and the ramp-up of Tegra 4. Now, however, the Tegra 4 is finally starting to find its way into devices, and Tegra revenue has more than doubled from last quarter.

Design wins such as Microsoft's Surface 2 tablet and Xiaomi's Mi3 Super Phone have driven the Tegra business forward, and NVIDIA's introduction of the Tegra Note, a reference tablet platform that will be manufactured by the company's partners, should aid NVIDIA in picking up market share. Tegra is still a drain on the company's profits, but the progress being made is encouraging.

Higher dividend, more buybacks
Two big announcements in the earnings release were a 13% dividend increase and an additional $1 billion added to the buyback program. NVIDIA has about $3 billion in cash, so the company is capable of returning more cash to shareholders. NVIDIA also announced that it intends to return about $1 billion to shareholders during the next fiscal year through dividends and buybacks. For comparison, NVIDIA's current market capitalization is about $9 billion.

These developments show that management is confident in the company's future. 

The bottom line
NVIDIA's business is strong, and while revenue and earnings declined in the quarter, this was largely due to weakness in low-margin products. Gaming GPU sales are rising, and NVIDIA's enterprise business shows a lot of potential. The stock remains a good value, and I expect to see great things from NVIDIA going forward.