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NVIDIA Corporation (NVDA - Analyst Report) is scheduled to announce its third quarter 2013 results on November 8, 2012. In the run up to the earnings release, we noticed some movement in the analysts’ estimates.

Second Quarter Overview

Nvidia reported adjusted earnings per share of 20 cents, which surpassed the Zacks Consensus Estimate by 5 cents. Total revenue increased 1.9% year over year to $1.04 billion..

The company’s GPU business was up 15.0% sequentially, due to a surge in demand witnessed by the company’s desktop segment, new product offerings and growing notebook shares, as the industry continues to move to the Ivy Bridge platform. While, the Professional Business segment was down 8.0% sequentially due to continued weak economic conditions in Europe and the slower ramp up of Romley platform. Consumer business was up 36.0% on the strength of the company’s Tegra business.

Gross margin on a GAAP basis was 51.8% versus 51.7% in the year-ago quarter. Efficient cost management and change in sales mix of high-margin products led the gross margin to exceed the company’s outlook.

Outlook

For the third quarter of fiscal 2013, revenue is expected in the range of $1.15 billion to $1.25 billion. GAAP and non-GAAP gross margins are expected to remain flat sequentially at 51.8% and 52.0%, respectively. Management expects GAAP operating expenses to be roughly $390 million; while non-GAAP operating expenses are projected roughly at $350 million. 

Agreement of Analysts

A look at estimate revisions in the last 30 days shows some negative sentiments, although there were minor revisions. Out of the 26 analysts providing estimates for the third quarter, 2 analysts revised their estimates downward over the last 30 days.

For fiscal 2013, 2 out of 26 analysts lowered their estimates, while one analyst revised their estimate upward, over the last 30 days. Again for fiscal 2014, 4 out of 26 analysts revised their estimate downward over the last 30 days, and none moved in the opposite direction over the last 30 days.

Some analysts expect PC demand to remain tepid and NVIDIA is not fully hedged from that. On the other hand, the share gains in mobile network make NVIDIA the best PC-oriented semiconductor play.

Some analysts have the same opinion as the company, that the Tegra offering is underappreciated by investors, with more revenue generations from tablets / WinRT which may result in new Tegra 4 offering in early 2013. If TSMC’s commentary that customers may balk at a 2013 move to 20nm given higher capital costs proves correct, Tegra’s advantage could have a longer tail than expected.

Some analysts believe that NVIDIA’s Tegra chips for smartphone and tablets are well positioned versus Texas Instruments (TXN - Analyst Report) and others as they are of good quality and offered at a competitive price. However, the largest vendors, Samsung and Apple (AAPL - Analyst Report), make their own processors and that is a negative factor.

Magnitude of Estimate Revisions

The Zacks Consensus Estimates for the third quarter have not changed in the last 30 days, while the same increased by 9 cents over the past 90 days to reach 30 cents. The Zacks Consensus Estimates for fiscal years 2013 and 2014 dropped by 1 cent and 4 cents to reach 89 cents and $1.04, respectively over a period of 30 days. In the last 90 days, the Zacks Consensus Estimates improved by 19 cents and 12 cents, respectively.

Recommendation

The company delivered modest second quarter results. Although the decline in PC demand may affect the result of the upcoming quarter, but new offerings from the company can help win new customers.

Moreover, the acquisition of data chip manufacturer Icera will add value to NVIDIA’s product portfolio. Moreover, the newly introduced NVIDIA PhysX technology will likely attract more gaming customers. However, the company is concerned about the fact that Tegra offering is underappreciated by investors. NVIDIA’s performance may be tempered slightly by the weak gaming market, economic slowdown in Europe and increased competition.

Currently, NVIDIA holds a Zacks #3 Rank, implying a short-term Hold rating.

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