It’s been two weeks since chip giant Nvidia reported its third-quarter earnings results. The company which is known for its high-end PC graphics chips is in the midst of a transformation. It is a mobile strategy that the company hopes can help it not only compete more effectively with the likes of Qualcomm and Texas Instruments, but also set the company on a sustained path towards growth - except, Wall Street isn't buying the story.
Will Growth Today Be Gone Tomorrow
Image via CrunchBase
Makeovers occur all the time on Wall Street. However, in the case for Nvidia bears believe that the company is too far behind the competition to make a meaningful dent in the market. This is whether or not its transition into mobile is considered a success. The thought is, if it yields little market share, what would have been the point? This is the same concern that is plaguing Intel. Nonetheless, that it was able to beat on both the top and bottom line in its most recent quarter, Nvidia appears determined to prove doubters wrong. The company generated net income of $209.1 million, or 33 cents per share on revenues of $1.2 billion – exceeding analysts’ estimates of 30 cents per share as well as revenue projections of $1.1 billion.
Interestingly, the better than expected performance was the effect of growing demand for the company’s line of Tegra chips. In other words, Nvidia is already doing what doubters proclaim it can’t. The company is figuring out ways to grow market share and outperforming (among others) rivals such as Advanced Micro Devices. On the other hand, that the low end of the company’s revenue guidance was 17% below analysts’ estimates left investors wondering if the momentum can be sustained, even though it would still represent double-digit growth. In other words, as well as the company might be performing today to the extent that both margins and income are showing annual and sequential improvement, this guarantees nothing in terms of the company’s market position in the future.
A Good Bet, But Failure Is Not An Option
I like Nvidia’s chances. But evidence suggests that what the company is attempting to do, which involves moving away from its legacy graphics business into mobile processors is not going to be easy. As noted in my opening, the space is already crowded with rivals with designs wins from prominent customers such as, Google and Microsoft. But equally important for investors to consider is that Nvidia risks alienating its core business during the transition.
While I do believe it is a worthwhile gamble, it is one that will come at a cost if Nvidia fails. This is the “bird in the hand theory.” For instance, one of the most impressive aspects of the company’s Q3 results was that Nvidia’s graphics business did pretty well. This is despite the chronic spread of PC “doom-and-gloom.” While the PC business is still seeing meaningful erosion from mobile, it says a lot that Nvidia can still outperform in that category.
So I questions the company’s full rush to mobile without having fully capitalized on what is left of its (yet popular) graphics business. Although Nvidia has made some good progress so far, failing is not an option as it could signal the end of the company – particularly since two-thirds of its revenue still comes from its PC graphics business.
For now, the company to betting everything on is Tegra line of mobile processors - a system on chip (SoC) that integrates many of the features of the ARM architecture into one package. It comes with features including low power consumption and high performance – making it one of the best chips on the market today.
Bottom Line
With the stock making new lows after dropping 11% following its earnings report, investors want to know if now is a good time to jump in. Or are the bears correct in their belief that Nvidia lacks the ability to convert from what it has been known for? The jury is still out on this one as it is going to take some time for either side to proclaim victory.
Although the company is finding it difficult to convince Wall Street that it can successfully transform and remain profitable, investors who are willing to believe in Nvidia’s story may be able to capitalize on a good turnaround candidate – one that now pays a respectable yield.
