How Low Can NVIDIA Earnings Go?

NVIDIA (NVDA 3.71%) will release its quarterly report on Thursday, and investors are bracing for tough times ahead for the company. With expectations that revenue will fall dramatically, NVIDIA earnings will be under pressure, and it'll take a strong effort from the company to get itself back on a stronger growth trajectory.

NVIDIA hasn't had any shortage of promising products to try to capture its fair share of the burgeoning mobile-device market. Yet with such fierce competition in the space, the company hasn't been able to translate its new products into higher sales and profits. Let's take an early look at what's been happening with NVIDIA over the past quarter and what we're likely to see in its report.

Stats on NVIDIA

Source: Yahoo! Finance.

When will NVIDIA earnings rebound?
In recent months, analysts have had mixed views about NVIDIA earnings, cutting their July quarter estimates by $0.01 per share but boosting their full-year fiscal 2014 views by $0.02 per share. The stock has kept climbing despite that uncertainty, rising 8% since early May.

NVIDIA's quarterly announcement in May got things started on the right foot for investors, with better-than-expected earnings coming from rising sales volumes of its high-margin Kepler graphics chips. With the company making digs at rival Qualcomm (QCOM -0.20%) by noting the speed and efficiency of its Tegra 4i 4G LTE mobile processor, NVIDIA gave favorable guidance for the July quarter as well. Still, NVIDIA didn't have perfect success, as sales of its Tegra mobile chips fell 22% from previous-year levels.

But NVIDIA faces the challenge of ultra-low-cost tablet offerings using low-end Chinese-designed chips. Neither NVIDIA nor Qualcomm can compete on price with these cheap tablets, and although they'll continue to fight for higher-margin sales at the top-end of the tablet space, foreign competition limits NVIDIA's flexibility to pursue the potentially higher sales volumes available from lower-cost offerings.

As a result, NVIDIA has refocused on gaming and other graphics-heavy applications. Its decision to license Kepler to third-party chip makers should give the graphics chip more exposure in mobile devices, attacking ARM Holdings and its graphics-chip designs at a weak point in which it has already struggled to get customers to buy both its CPU and graphics-chip offerings. Moreover, in late May, the company expanded its presence in the gaming cloud with its GRID virtual graphics processing unit.

One big issue this quarter has involved NVIDIA's Shield gaming device. The company started taking pre-orders for its Shield gaming device during the quarter, although it proceeded to cut its price in June from $349 to $299 in responding to calls that the handheld device was too pricey. A component-supply issue forced NVIDIA to delay shipments of the Shield by about a month, but the game is now available and should have an impact on earnings next quarter.

In the NVIDIA earnings report, watch closely for discussion of initial sales of Shield as well as the company's broader strategy in attacking the graphics space. The Shield numbers likely won't appear in the July quarter figures, but they could have a huge impact on the company going forward.

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