Updated from Nov. 6
roared higher Friday, a day after it reported that it swung to a profit in its latest quarter and -- of greater interest to investors -- said its gross margin is poised to show upside.
In recent trading, shares shot up $3.42, or 18.8%, to $21.59.
Heading into today's earnings call, investors had extremely low expectations, reflected in short-interest levels of around 15%, points out Michael McConnell of Pacific Crest. But Nvidia's comment on improving gross margin underscores what he calls "tremendous leverage to EPS" from gross margin gains.
The margin upside more than compensates for the fact that Nvidia came in 2 cents shy of the consensus estimate of 12 cents for pro forma earnings per share, by McConnell's reckoning. Pacific Crest has no banking relationship with Nvidia; McConnell has a neutral rating on the shares.
But while EPS seems poised to rebound over the next few quarters, Nvidia predicted only sequentially flattish sales -- suggesting the sharp stock rally may be in part driven by sentiment.
"I think people are looking for reasons to buy, since others have taken off and Nvidia hasn't participated in the run," says Brian Alger of Pacific Growth Equities. "People are excited to hear the gross margin is improving and the company feels it's reached a bottom, but I believe that's built into most people's models," he points out.
Heading into the call, Alger had an equal weight rating on Nvidia, assuming EPS of 68 cents -- slightly above the Street's 64-cent estimate -- and sales of $2.1 billion for next year, also a notch above the consensus outlook for $2 billion.
Nvidia reported that its third-quarter revenue was in line with Wall Street's expectations, growing 13% to $486.1 million. Sales were in line with Nvidia's August forecast range, though its own projection fell below the Wall Street consensus at the time.
Gross margins stood at 27.6%, down from 28.3% in the second quarter. But the company said the latest quarter marks the bottom, with margins expected to climb as of the third quarter.
Net income totaled $6.4 million, or 4 cents a diluted share, compared to a net loss of $48.6 million, or 32 cents a share, last year.
Results reflected a charge of $3.5 million for the write-off of in-process research and development that resulted from Nvidia's acquisition of MediaQ in August 2003. Another charge of $13.1 million was taken for expenses related to the full redemption of Nvidia's $300 million of 4.75% convertible subordinated notes in October.
Nvidia guided for sales to stay flat in the January quarter, in line with Street expectations. Xbox sales, which accounted for 25% of revenues in the October quarter, are expected to decline by $80 million. But that's expected to be offset by $80 million of growth in Nvidia's core products.
In the quarter now under way, margins should rise by about one percentage point. Nvidia didn't issue specific guidance on earnings, but analysts are expecting it to stay flat with the just-ended quarter.
In a statement, CEO Jen-Hsun Huang said the company's "business fundamentals have turned the corner," saying its GeForce FX architecture gives it momentum.
But analysts have lately sounded somewhat underwhelmed by the product refreshes Nvidia released in late October. In a recent research note, Jonathan Hykawy of Harris Partners said the chips weren't powerful enough to unseat
as the performance leader in the enthusiast and mainstream market segment. He noted that ATI has been showing climbing market share at the same time Nvidia has given up ground.
He added that Nvidia is likely to be competitive with ATI in terms of performance by early calendar year 2004, though ATI maintains a cost advantage because its chips cost less to manufacture.
His firm hasn't banked for either company.