NVDA Preview: Could See a Little Upside

Nvidia (NVDA - commentary - Trade Now) is slated to report earnings after the close on Thursday with a conference call scheduled for 5:00 p.m. EST.

Current projections call for the company to post EPS of 10 cents on revenue of $837 million. I wouldn't be surprised to see a little upside to these estimates as Apple's (AAPL - commentary - Trade Now) MacBook (an Nvidia customer) sales were pretty strong during the quarter, and the overall inventory levels remain in balance.

In the graphics segment, look for ASPs around $22 to $25 with 30 million units sold. Listen for commentary around market share -- is the company losing some to Advanced Micro Devices (AMD - commentary - Trade Now)? -- and how the industry growth rates look in the face of a pending PC upgrade cycle. We'll also need to hear about the overall profitability levels. Look for gross margins in the 37% range or higher.

The overall movement to lower-end PCs and notebooks is not generally viewed as a favorable trend for Nvidia's chipset business, so we'll want to hear management's tone about this segment, which accounts for about 30% to 35% of sales.

At about 25 times forward estimates, I think the stock is pretty close to being fairly valued. However, there is a fair amount of short interest in the name, so a bullish outlook could fetch a nice squeeze in the name.

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At the time of publication, Thomas was long Apple, although holdings can change at any time without notice.

Ben Thomas, CFA, is the founder and managing principal of Waycross Partners. Waycross Partners is a long/short hedge fund that focuses on the technology and health care sectors. Before Waycross, Ben was a portfolio manager and senior equity analyst at INVESCO, where he was part of a team that managed over $20 billion in assets. While at INVESCO, he was the lead manager for the INVESCO Midcap Growth fund as well as the firm's senior equity analyst covering technology stocks.

Prior to INVESCO, Ben worked for Banc One Securities and Prudential Securities. He graduated from the University of Kentucky with a bachelor's degree in finance and went on to earn his MBA from Indiana University. Ben is a member of the CFA Institute and serves on the board of directors for the CFA Society of Louisville.