"Never underestimate the power of diminished expectations."
-- Anon.

"Actually, go ahead and underestimate it."
-- NVIDIA shareholders

Many a company -- such as Celgene, Intuitive Surgical, and Ctrip.com -- swear by the practice of lowering guidance to the point where it can be easily stepped over, then doing so and reaping the rewards. Yet, when Motley Fool Stock Advisor recommendation NVIDIA (NASDAQ:NVDA) tried to walk and chew gum earlier this week, it wound up flat on its back with a face covered in bubblegum.

Watch that first step. It's a doozy.
All Wall Street asked of NVIDIA was that it lose no more than $0.11 per share last quarter. NVIDIA obliged, losing $0.09 (Ahem. "Before items.") Yet rather than cheer, investors sold the stock off by 12%. What gives?

I mean, NVIDIA did everything right last quarter. While fiscal Q1 2010 sales dropped 42% year over year, and profits, as already mentioned, did not happen, the rest of the company's report reads pretty darn good. Take inventories for example. With sales down so much, you might expect inventories of unsold goods to skyrocket. Instead, NVIDIA cleared out nearly 40% of the old chips 'n' such that it had lying around the warehouse.

What's more, converting all those inventories to cash did wonders for the firm's free cash flow, which ran positive to the tune of $121.4 million. By my calculations, this means NVIDIA is once again free cash flow-positive for the trailing 12 months. Plus, with so many goods flowing out of the warehouse and into the market, NVIDIA achieved its second straight quarter of rising market share in stand-alone GPUs -- the company's graphics chips compete with lower-end graphics processors from Intel (NASDAQ:INTC), and Advanced Micro Devices (NYSE:AMD) on the high end.

Finally, Taiwan Semiconductor (NYSE:TSM), the firm that manufactures NVIDIA's processors, announced today that its April sales jumped 60% over March totals. Since NVIDIA is one of Taiwan Semi's major customers this news could very well be a hint of future upside for the company. Then again, Taiwan Semiconductor has a host of customers including such giants as Texas Instruments (NYSE:TXN) and Qualcomm (NASDAQ:QCOM), so the news might be more the industry's gain than NVIDIA's.

So should we buy it or not?
Listen, Fools. I'd love to tell you that NVIDIA is a huge bargain, and you should buy it. Fact is, I suspect the company's turned the corner and is about to make a big run. Problem is, with this little free cash flow, I can't say that for sure.

Why not? Because by my usual valuation metrics, the firm's $20 million in trailing cash profits still don't justify buying the stock -- but my "usual valuation metrics" don't work particularly well with companies just transitioning across the border from "losing lotsa loot" to "barely in the black."

Foolish takeaway
While I, personally, am optimistic about the stock, this week's trading shows us that it's awfully hard to set your expectations "too low" for NVIDIA. Until the free cash flow picture firms up, buy this one at your own risk.