NVIDIA's Results Look Good, So Why Did Shares Drop?

NVIDIA , a leading developer of GPU-centric solutions that span a broad range of applications from mobile to the data center, reported solid earnings at its most recent quarterly release. Let's dig into the results and, more importantly, try to get a sense of why, in light of a solid report, shares took a breather.

The numbers look good
For the most recent quarter, revenue came in at $1.103 billion, up a solid 16% year over year, and driven by a strong core GPU business as well as renewed growth in the Tegra business (which was up 35% year over year). While operating expenses grew slightly year over year, the revenue/gross margin dollar growth was more than enough to offset it, leading to a 75% increase in net income and -- thanks to those aggressive buybacks -- about an 85% increase in earnings per share.

As far as the forward guide goes, NVIDIA is calling for $1.1 billion on the top line (which was ahead of sell-side consensus) next quarter (roughly flat quarter-over-quarter), and gross margins to decline slightly to between 53.7% and 54%. The gross margin hit is largely due to the projected increase in Tegra sales for mobile and automotive, which obviously carry lower gross margins than gaming GPUs. Operating expenses are expected to be up to $457 million, a slight increase from $453 million in the prior quarter.

Why is the stock down?
The obvious question at this point, then, is if the numbers look good, why is the stock down? Well, consider for a moment that the stock is already up about 30% over the last year, and a lot of the "fears" that kept the stock in bargain-bin territory have now largely proven false (and the stock price reflects that).

Sell-side expectations are calling for $0.85/share in earnings for the current fiscal year (ending in Jan. 2015) and $0.95/share for the following year. At about $18/share, and with about $5.39/share in net cash, the company is trading at roughly 14.9 times this year's estimates and about 13.27 times next year's estimates. This is by no means an expensive stock, and the downside from current levels is likely limited, but after such a good run, and following "good" but not "blowout" results in a market that seems to punish anything but excellence, a roughly 3% drop is expected and nothing to worry about long term.

Where does it go from here?
At this point, NVIDIA has a lot of growth drivers going for it: GeForce for gaming PCs should continue to be robust, Tegra is getting its bearings, and professional/workstation/HPC continues to be quite a nice and healthy growth segment for the company.

There will always be those who worry that Intel will make NVIDIA's GPU business irrelevant with beefier integrated graphics, but this argument hasn't worked in the past, and will likely continue to fail in the future as games continue to become more and more demanding, soaking up every last GPU cycle possible. NVIDIA's core GPU business is safe, and the question here is only one of future potential growth drivers rather than one of long-term viability.

Foolish takeaway
While NVIDIA is certainly not the no-brainer bargain it was in the $12 range, it is still an excellent company with valuable IP, a strong core business, and an aggressive management team unafraid of taking bold risks to try to drive future growth. The shares may be due for a breather after such a nice run over the last year or so (meaning you might want to wait for a pullback before initiating a new position or adding to a current one), but long term -- as long as the company executes on its vision -- shareholders should be nicely rewarded. 

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The article NVIDIA's Results Look Good, So Why Did Shares Drop? originally appeared on Fool.com.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel and Nvidia. The Motley Fool 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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