Nvidia Looks Set to Trade Up

Nvidia (NVDA - commentary - Trade Now) reported a nice quarter, and it could be just enough to produce the upward squeeze that I mentioned in the preview.

For the quarter just ended, the company posted EPS of $0.19 on revenue of $903 million. The gross margin came in at 41%, which is better than expected on the back of improved unit sales and improved yields.

Graphics revenue of $464 million is up 25% sequentially, while microprocessor revenue gained 4% sequentially to $248 million. Demand in the Graphics segment (about half of total revenue) was strong in both notebook and desktop with many customers on allocation due to strong demand and supply constraints.

Guidance: Fourth-quarter sales are seen up 2% from third-quarter levels (implies $921million) vs. estimates of $868 million. GAAP gross margin is seen in the range of 40% to 42% (implies non-gaap gross margins around 38% to 40%).

Nvidia continued to show more traction on the Tegra side of the business. This started out as a chipset to the Zune but should expand to smartphones and applications over the next 12 months.

These results were obviously better than expected even with some people baking in some upside due to sales of Apple's Mac. However, the margin upside was an added boost.

CEO Jen-Hsun Huang must have said at least 20 times that they were supply constrained and indicated that they had some challenges getting wafers out of the foundries. (This could offer some insight into other parts of the semiconductor market).

I think the stock could trade up nicely if the overall market can hold up. I will strongly consider this name over the intermediate term.

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At the time of publication, Thomas was long AAPL, 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.