NVIDIA Corporation Delivers an Earnings Blowout

Updated

On Wednesday afternoon, NVIDIA Corporation reported stellar Q4 results. Revenue grew 9% sequentially and 3% year over year to $1.14 billion, which was well ahead of the company's guidance range of $1.05 billion plus or minus 2%. While EPS declined slightly year-over-year (from $0.28 to $0.25), that easily beat the average analyst estimate of $0.18.

Six months ago, following a mixed earnings report and weak outlook, I argued that shareholders should give NVIDIA another year to get back on track. NVIDIA's strong earnings report and its solid guidance for next quarter are great signs that investors' patience is about to be rewarded.

Strength in the legacy business
NVIDIA's strong results were driven not by its growth initiatives in mobile computing or cloud-based graphics processors, but by its core GPU business. The company saw continued strong sales of its Quadro workstation graphics cards and Tesla GPUs for supercomputers and other high-performance applications.


Moreover, the strongest aspect of NVIDIA's business was its line of GeForce consumer GPUs. A few years ago, many analysts worried that improvements in integrated graphics cards made by Intel would render stand-alone graphics cards all but obsolete.

Many analysts have worried about the future of stand-alone graphics cards.

Instead, while sales of entry-level GPUs have been cannibalized by integrated graphics cards, this has been more than offset by strong growth in high-end GPU sales. These GPUs are used primarily by gamers, and the increasing complexity of games requires state-of-the-art graphics cards.

As a result of strong demand from gamers and market share gains, NVIDIA grew sales of its high-end GeForce GTX GPUs nearly 50% year over year in Q4. This was the primary factor driving 14% revenue growth in the GPU business, which more than offset a year-over-year decline in sales of Tegra mobile processors. Strong sales of high-end GPUs also helped NVIDIA post record annual gross margin of 54.9%.

Time for a Tegra comeback
The strength in NVIDIA's core GPU business helped offset weak sales of its Tegra mobile processors. In fact, revenue for the Tegra Processor business segment declined 48% for the full year, largely due to the late launch of the Tegra 4 chip, which may have cost NVIDIA some key design wins.

By contrast, NVIDIA is well positioned for growth in all of its main product lines next year. The gaming, workstation, and high-performance computing markets are all demonstrating strong momentum, and Tegra is likely to make a big comeback in 2014.

First, whereas Tegra had one (late) product in 2013, NVIDIA plans to release three Tegra chips this year. In the next few months, the Tegra 4i processor, which has an integrated modem, will hit the market. The first Tegra K1 chips -- which include NVIDIA's Kepler GPU architecture -- will also ship in the first half of the year. A second batch of K1 chips, with a 64-bit custom CPU designed by NVIDIA, will hit the market later in the year.

With such a busy product pipeline and an easy comparison, NVIDIA is potentially on track for triple digit growth in the Tegra Processor segment beginning in Q2. Revenue gains will also be bolstered by NVIDIA's growing automotive business, which sells Tegra processors to power infotainment systems and digital instrument clusters.

Foolish conclusion
NVIDIA just finished a very tough year with a solid Q4 performance. The company's core GPU business is posting its best results ever. Meanwhile, it has become very shareholder-friendly in recent years, and is returning excess cash through dividends and a big share repurchase program.

In 2014 (NVIDIA's 2015 fiscal year), the Tegra Processor segment is likely to return to strong growth due to its multiple key product launches. With the rest of the business firing on all cylinders, that may be the last piece of the puzzle needed to send NVIDIA stock soaring.

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The article NVIDIA Corporation Delivers an Earnings Blowout originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of NVIDIA and is short March 2014 $17 calls on NVIDIA. The Motley Fool recommends NVIDIA. It recommends and owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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