Enjoy coloring by numbers? How about reading numbers from colorers? Graphics-chip maker NVIDIA (NASDAQ:NVDA) reports Q2 2007 earnings tomorrow afternoon.

What analysts say:

  • Buy, sell, or waffle? Thirty analysts still follow NVIDIA. Since last quarter, though, they've adopted a less ursine tone. Twelve now rate the company a buy, 15 a hold, and three a sell.
  • Revenues. On average, the analysts are looking for 17% higher sales, or $673.6 million total.
  • Earnings. Profits are expected to grow 28% to $0.27 per share.

What management says:
Two quarters back, CEO Jen-Hsun Huang went on record predicting "another strong year" for NVIDIA in 2007. One quarter ago, CFO Martin Burkett chimed in with an update, calling for flat sequential sales between Q1 and Q2. That may not sound like good news, but as fellow Fool Anders Bylund pointed out back in May, it's actually quite good, since the business normally sees a seasonal sales decline during this time of year.

With Huang continuing to promise a strong finish to the year as Microsoft's (NASDAQ:MSFT) Vista operating system and Sony's (NYSE:SNE) PlayStation 3 go to market, driving demand for NVIDIA chips for PCs and gaming consoles, respectively, things are looking bright indeed for the company.

What management does:
There's very little new to report here. Basically, the same trend we discussed in last quarter's Foolish Forecast held true through the last quarterly report. The only question is whether tomorrow's news can continue to keep gross, operating, and net margins moving upward at the tremendous pace they've maintained in the past.

Margins %

1/05

5/05

7/05

10/05

1/06

4/06

Gross

32.3

33.5

35.2

36.8

38.3

40

Op.

5.7

7.8

10.8

13

14.9

16.3

Net

5

6.8

9.5

10.9

12.7

13.3

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:
Of course, all of the above good news has been known for months. Yet none of it (a) prevented the stock from losing one-third of its market cap between release of the Q1 earnings report and July 21, or (b) explained the stock's remarkable 37% climb in price between July 21 and today. To get from there to here took just a single press release from the soon-to-be-combined firm of AMD (NYSE:AMD) and ATI (NASDAQ:ATYT). Turning again to Anders' analysis (seriously, the guy's a silicon-writing machine), we see that he predicts the AMD/ATI alliance will help to force Intel (NASDAQ:INTC) and NVIDIA, traditional competitors in the graphics-chip space, closer together. ("The enemy of my enemy is my friend," ya know?)

Apparently, investors have been thinking along the same lines, but taking the firms' newfound common interests to their logical extreme. They're now betting that Intel will make a bid to bring NVIDIA in-house. Since nothing has changed in NVIDIA's business proper, it's the only logical explanation for the stock's sudden rise. Perversely, though, that suggests that even if it turns in a truly blowout quarter -- a possibility I won't discount, considering that the firm hasn't met an earnings estimate it couldn't crush in three years -- the stock may not benefit at all. At this point, it's not performance that investors are betting on; they're buying in, in hopes of getting bought out.

If you own NVIDIA, or are contemplating it, you owe it to yourself to find out what the competition's up to. Read all about it in "AMD + ATI = True Love."

Intel is a Motley Fool Inside Value pick, while NVIDIA is a Motley Fool Stock Advisor pick. Whatever your investing style, the Fool has a newsletter for you.

Fool contributor Rich Smith owns shares of Intel. The Fool has a disclosure policy.