NVIDIA Corporation Delivers an Earnings Blowout

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On Wednesday afternoon, NVIDIA Corporation (NASDAQ: NVDA  ) reported stellar Q4 results. Revenue grew 9% sequentially and 3% year over year to $1.14 billion, which was well ahead of the company's guidance range of $1.05 billion plus or minus 2%. While EPS declined slightly year-over-year (from $0.28 to $0.25), that easily beat the average analyst estimate of $0.18.

Six months ago, following a mixed earnings report and weak outlook, I argued that shareholders should give NVIDIA another year to get back on track. NVIDIA's strong earnings report and its solid guidance for next quarter are great signs that investors' patience is about to be rewarded.

Strength in the legacy business
NVIDIA's strong results were driven not by its growth initiatives in mobile computing or cloud-based graphics processors, but by its core GPU business. The company saw continued strong sales of its Quadro workstation graphics cards and Tesla GPUs for supercomputers and other high-performance applications.

Moreover, the strongest aspect of NVIDIA's business was its line of GeForce consumer GPUs. A few years ago, many analysts worried that improvements in integrated graphics cards made by Intel (NASDAQ: INTC  ) would render stand-alone graphics cards all but obsolete.

Many analysts have worried about the future of stand-alone graphics cards.

Instead, while sales of entry-level GPUs have been cannibalized by integrated graphics cards, this has been more than offset by strong growth in high-end GPU sales. These GPUs are used primarily by gamers, and the increasing complexity of games requires state-of-the-art graphics cards.

As a result of strong demand from gamers and market share gains, NVIDIA grew sales of its high-end GeForce GTX GPUs nearly 50% year over year in Q4. This was the primary factor driving 14% revenue growth in the GPU business, which more than offset a year-over-year decline in sales of Tegra mobile processors. Strong sales of high-end GPUs also helped NVIDIA post record annual gross margin of 54.9%.

Time for a Tegra comeback
The strength in NVIDIA's core GPU business helped offset weak sales of its Tegra mobile processors. In fact, revenue for the Tegra Processor business segment declined 48% for the full year, largely due to the late launch of the Tegra 4 chip, which may have cost NVIDIA some key design wins.

By contrast, NVIDIA is well positioned for growth in all of its main product lines next year. The gaming, workstation, and high-performance computing markets are all demonstrating strong momentum, and Tegra is likely to make a big comeback in 2014.

First, whereas Tegra had one (late) product in 2013, NVIDIA plans to release three Tegra chips this year. In the next few months, the Tegra 4i processor, which has an integrated modem, will hit the market. The first Tegra K1 chips -- which include NVIDIA's Kepler GPU architecture -- will also ship in the first half of the year. A second batch of K1 chips, with a 64-bit custom CPU designed by NVIDIA, will hit the market later in the year.

With such a busy product pipeline and an easy comparison, NVIDIA is potentially on track for triple digit growth in the Tegra Processor segment beginning in Q2. Revenue gains will also be bolstered by NVIDIA's growing automotive business, which sells Tegra processors to power infotainment systems and digital instrument clusters.

Foolish conclusion
NVIDIA just finished a very tough year with a solid Q4 performance. The company's core GPU business is posting its best results ever. Meanwhile, it has become very shareholder-friendly in recent years, and is returning excess cash through dividends and a big share repurchase program.

In 2014 (NVIDIA's 2015 fiscal year), the Tegra Processor segment is likely to return to strong growth due to its multiple key product launches. With the rest of the business firing on all cylinders, that may be the last piece of the puzzle needed to send NVIDIA stock soaring.

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 13, 2014, at 2:17 PM, KenLuskin wrote:

    With Mantle, AMD can position themselves much better - offering a cheaper CPU, with similar performance to that of a much more expensive setup from the competition. Once AMD has Mantle under control and working with more games, it could really disrupt the gaming market with its APU line of products.

    Imagine a $300 APU giving performance similar to that of a $1200+ Intel setup... which would you buy? I know what I'd buy, and I can tell you it starts with an "A"

    AMD's Dual Graphics Will Disrupt Gaming Market

    So, in short not only is dual graphics improving performance up to its potential it is also producing images that are nearly on par with single GPU solutions.

    This important take away is that this is simply just the beginning. This configuration is now competitive with larger CPU/dGPU combinations costing more money. The value of this technology will only improve with time as drivers mature.

  • Report this Comment On February 13, 2014, at 2:40 PM, rustianowski wrote:

    Good news for Nvidia, definitely....Blowout, hardly. Work on those writing skills.

  • Report this Comment On February 13, 2014, at 3:10 PM, wownwow wrote:

    "NVIDIA Corporation Delivers an Earnings Blowout"

    "Net Income down 16% (Y/Y)! " Wow, what a Earning Blowout!

    Repurchased 62 million shares ($887 million) to hold Earning per share (Y/Y).

    People now use their fingers on their touch phones ans pads more than their brains.

  • Report this Comment On February 14, 2014, at 3:27 AM, wildeweasel wrote:

    A $300 dollar APU will never beat a CPU, GPU combo in performance. AMD is not the only company spending on R&D. A $300 dollar all-in-one is a "Good enough" solution for low end use and that is all.

    Beating EPS estimates by over 33% is certainly a blow out, even if EPS was lower due to product development and changing markets.

    Nvidia has been in an innovate or die business sector since inception and are steering into some really exciting new products. They are definitely a good buy while there is still all this negativity out there.

  • Report this Comment On February 14, 2014, at 9:19 AM, TMFGemHunter wrote:

    I'll admit that NVIDIA's results weren't a blowout compared to the prior-year results. But it was a big improvement sequentially and an even bigger surprise relative to expectations, which is the most important thing in investing.

    NVIDIA bought back a lot of shares last year, but it's really just offsetting the dilution that had occurred in the previous few years. 10 years ago, NVIDIA only had about 500M shares out; even after this year's buyback, the share count will still be higher than that historical figure.


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Adam Levine-Weinberg

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry!

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