Nvidia Earnings Preview: What We Are Watching

August 5th, 2011 by Trefis Team
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Nvidia (NASDAQ:NVDA) plans to report its Q2 fiscal 2012 earnings on Thursday, Aug 11. Given the fact that the stock has had some significant swings this year jumping 60% from January to February before sliding to current levels, the upcoming earnings will be crucial to the stock’s direction. Its rivals AMD (NYSE:AMD) and Intel (NASDAQ:INTC) have reported impressive results, but does that guarantee good show by Nvidia? Below we present our take on a few key items to watch out for.

Our price estimate for Nvidia stands at $21.25, implying a significant premium to the market price.

Watch Out for Discrete GPU Growth and Impact of China Slowdown

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One of the reasons that Nvidia’s stock has slumped is investors’ skepticism regarding the growth of the discrete GPU business given Intel’s and AMD’s launch of hybrid CPUs. Intel launched Sandy Bridge CPUs earlier in the year and AMD launched its Llano CPUs recently. These CPUs essentially replace entry level graphics and over-time may pose even a bigger threat as hybrid technology improves.

The initial impact is being observed, and we noted earlier that Nvidia’s GPU sales in China in Q2 slowed. Further information concerning this geography will be critical since it accounts for about 35% of Nvidia’s revenues, and discrete GPUs constitute about 20% to Nvidia’s stock. [1]

Watch Out for Tegra Growth

One way to mitigate the impact of possible slowdown in discrete GPU sales is boosting mobile revenues. The Tegra processor has shown great promise and is leading the growth for Nvidia. While its growth was impressive in the last quarter, it will be interesting to see if it can sustain the momentum. The problem lies in the popularity of the iPad which still dominates the tablet sales and does not use Nvidia’s application processors. However to mitigate this, Nvidia is likely to promote Tegra processors in smartphones to a great extent.

If problems emerge in both the discrete GPU and mobile business, we may have to lower Nvidia’s estimates significantly following the upcoming earnings. A cautionary note for investors: while Nvidia may demonstrate high revenue growth on year-over-year basis, it may not be truly reflective of future prospects since Q2 of last year had unusually low sales due to weakened demand and shift to lower priced GPUs.

See our complete analysis for Nvidia’s stock.

Notes:
  1. Nvidia: Intel’s Sandy Bridge Hits GPUs In China, Says Pac Crest, Barron’s, June 9 2011 [↩]