At first glance, you might not expect the news that NVIDIA (NASDAQ:NVDA) released last night to be the stuff of which 15% stock rallies are made.

Earnings for the fiscal third quarter of 2009 amounted to just $0.11 per share -- profits were down 74% from last year. However, if you disregard such sundries as stock-option and restructuring costs, it would have earned $0.20 per share (pro forma), so it actually beat adjusted estimates of $0.12 handily.

There and back again
More important than NVIDIA's performance in the earnings game is ... its performance, period. And as discussed in our pre-earnings Foolish Forecast, NVIDIA is making progress in cleaning up its historical issues and laying the groundwork for future growth. Over the course of the quarter, NVIDIA developed notebook chipsets for Intel (NASDAQ:INTC) processors, launched its GeForce 9400M GPU for Apple's (NASDAQ:AAPL) Mac notebooks, and developed a new accelerator for use with Adobe's (NASDAQ:ADBE) Creative Suite 4.

The new products are nice, yet other issues remain. For example, CEO Jen-Hsun Huang boasted, "Improving gross margin while managing operating expenses enabled us to significantly improve our operating fundamentals."

But that depends highly on your point of view. Yes, these numbers were better than last quarter's disastrous 17% gross and operating loss. But apples to apples -- comparing this year's Q3 to last year's -- gross margins did not improve a whit. To the contrary, they tumbled more than 5 full percentage points to 41%. Meanwhile, "operating expenses" surged more than 15% year over year for the quarter. Currently, the company's operating margin is lower than those of Texas Instruments (NYSE:TXN) and Qualcomm (NASDAQ:QCOM) but better than that of the anemic Advanced Micro Devices (NYSE:AMD).

Meanwhile, the CEO believes that NVIDIA is "now poised to recapture lost share." Partly as a consequence of lost market share, I cannot help noting that NVIDIA's inventories now tower 71% higher than in Q3 of last year.

Foolish takeaway
To this Fool, the extra inventories that must be moved, coupled with the need to recapture lost market share, foreshadow price drops on NVIDIA chips and further margin deterioration down the road.

Granted, the stock's price -- around a 10 price-to-earnings multiple on a predicted 15% grower -- seems to discount this risk pretty well. But is the margin of safety big enough to make NVIDIA a buy after today's price spike? That, I'm no longer certain of.

For further Foolishness on NVIDIA:

Intel is a Motley Fool Inside Value pick and a Motley Fool PRO recommendation. NVIDIA and Apple are Motley Fool Stock Advisor picks. The Motley Fool also owns a few shares of Intel.

Fool contributor Rich Smith owns no shares of any company named above. The Motley Fool has a disclosure policy.