Ah, the second fiscal quarter. NVIDIA (NASDAQ:NVDA) shareholders might not want to remember it, but this was the last time their company failed to top analyst estimates on Wall Street (ever since, it's been beating them with a stick). Will the Q2 jinx rear its ugly head again when NVIDIA reports on Thursday?

What analysts say:

  • Buy, sell, or waffle? Twenty-five analysts play NVIDIA, giving it 15 buy ratings, nine holds, and a sell.
  • Revenues. Analysts expect to see 25% sales growth to $858.5 million.
  • Earnings. Profits are predicted to fly even higher, up 45% to $0.42 per share.

What management says:
I can't say that I was particularly thrilled with NVIDIA's most recent 8-K filing. In June, the company advised that it is updating its equity incentive plan to issue an additional 101.8 million shares of stock in the form of "stock options, nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards, performance cash awards, and other stock-based awards to employees, directors and consultants." Whatever you call them, these awards carry the potential of diluting current shareholders out of as much as 28% of their stake in the company over the course of the next 10 years.

What management does:
Suffice it to say that NVIDIA is going to have to produce some pretty good numbers -- revenues, earnings, and margin expansion -- to justify dilution on this scale. Fortunately for shareholders, it's been doing just that. Rolling gross, operating, and net margins have increased in each of the past six quarters. Far ahead of Creative Tech (NASDAQ:CREAF), and even farther ahead of money-losing AMD (NYSE:AMD), NVIDIA's operating margins currently lag only those of Texas Instruments (NYSE:TXN) and Intel (NASDAQ:INTC) among big-name semiconductor makers.





























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:
Even so, this Fool laments the fact that NVIDIA investors aren't receiving the full benefit of this firm's superb performance. Way too much of NVIDIA's profits are going to just mute the effects of its self-inflicted dilution. For example, also in June, the firm reminded us that it has permission from its board to spend $1.7 billion to repurchase its own shares. NVIDIA spent $125 million to buy back 3,333,333 shares on June 4, and intends to spend a little over $40 million to repurchase one million more shares in Q3. Adding insult to injury, management says straight out that its rationale for making the buybacks is not because it thinks its shares undervalued. Rather: "Our stock repurchases are designed to offset dilution from stock issuances pursuant to our employee benefit plans."

If I might add one more criticism: NVIDIA needs to fire whomever has been writing its 8-K filings. The filing describing the June 4 buyback was particularly atrocious , detailing a purchase of "$125.0 million shares of our common stock," pursuant to which NVIDIA received "3,333,333 million shares." That's a really vague amount of money (or was it stock?), guys. But if you really did get 3.333,333 trillion shares for it, then kudos!

You probably know by now that at Motley Fool Stock Advisor, Fool co-founder David Gardner is responsible for recommending NVIDIA to our members -- and the stock has turned into a four-bagger for us since he recommended it in April 2005. What you may not know is that David also majored in English at the University of North Carolina at Chapel Hill. What does English-major David think about the prose in NVIDIA's press releases, and the poetry of its business? Try out Stock Advisor free for 30 days and find out.

Intel is a Motley Fool Inside Value recommendation.

Fool contributor Rich Smith does not own shares of any company named above. Why do we tell you this? Because The Motley Fool has a disclosure policy.