Shares of NVIDIA Corporation NVDA continue to trend upward following the better-than-expected third-quarter fiscal 2016 results and encouraging revenue guidance for the fourth quarter issued on Nov 5. The stock has gained more than 22% since then.
Moreover, year-to-date, shares of this Zacks Rank #1 (Strong Buy) company have gained over 70%. The stock also hit a new 52-week high of $33.81 last week.
The company reported adjusted earnings (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs and other one-time items) on a proportionate tax basis of 40 cents per share, comfortably surpassing the Zacks Consensus Estimate of 25 cents.
Revenues not only increased 6.5% year over year to $1.31 billion but also beat the Zacks Consensus Estimate of $1.18 billion. The year-over-year increase was primarily supported by higher-than-expected growth in GTX gaming platform, high-performance computing, cloud and automotive platforms.
NVIDIA’s adjusted gross margin (including stock-based compensation but excluding other one-time items) expanded 107 basis points (bps) year over year to 56.3%. In dollar terms, gross profit came in at $734 million, up 8.6% from the year-ago period, primarily driven by strength in gaming platform and higher revenue base.
Moreover, NVIDIA’s adjusted operating margin was up 149 bps from the year-ago quarter to 19.7%, reflecting growth in its GeForce GTX GPU business and higher revenue base. In dollar terms, adjusted operating income increased from $223 million to $257 million. (Read: NVIDIA Rises on Q3 Earnings & Revenue Beat, Guides Well)
Over the past four quarters, the company’s earnings have surpassed the Zacks Consensus Estimate thrice, bringing the average to a positive surprise of 53.2%.
Over the last 30 days, 13 out of 16 estimates for NVIDIA were revised upward for the current quarter, while 12 out of 13 estimates moved north for fiscal 2016. The Zacks Consensus Estimate for the current quarter increased 22.2% (6 cents) to 33 cents and that for fiscal 2016 went up 31.6% (25 cents) to $1.04.
For the fourth quarter, NVIDIA expects revenues to be roughly $1.30 billion (+/-2%), primarily on the back of the growth in gaming, data center, cloud and auto infotainment businesses. The Zacks Consensus Estimate is pegged at $1.223 billion.
It is worth mentioning that NVIDIA’s focus on GRID platforms can increase GPU adoption in data centers, giving it a competitive advantage. NVIDIA GRID is a powerful GPU-based platform that supports corporate virtualized desktops in data centers, cloud gaming services and design software-as-a-service.
NVIDIA and VMware VMW entered into a strategic alliance to run the NVIDIA GRID technology on VMware Horizon Desktop-as-a-Service (DaaS) platform. This will help the former to enrich its virtualization, automation and cloud-based portfolios. We believe that NVIDIA’s GRID enterprise virtual graphics, which enhance the visual effects of games, will support revenue and margin growth.
Furthermore, NVIDIA’s innovative product pipeline and strength in gaming and high-end notebook GPUs keep it well positioned, in our view. We also consider the higher adoption of NVIDIA’s Tegra processors to be a catalyst.
Nonetheless, the persistent decline in PC sales is a concern for NVIDIA’s GPU segment. Competition from the likes of Intel INTC and QUALCOMM Inc. QCOM also remains a near-term headwind.
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