Nvidia Is A Sell Before Earnings, Here's Why

| About: NVIDIA Corporation (NVDA)

Nvidia (NASDAQ:NVDA) will be releasing its third-quarter results on November 7, but in my opinion, it would be a good idea for investors to sell this stock. So far this year, Nvidia has appreciated around 22%, but difficult times might lie ahead for the company.

When Nvidia had released its second-quarter results, it became clear that the company is struggling. It was not surprising to see the company's revenue and earnings fall from the year-ago period, given the fact that the PC market has been on shaky ground and Nvidia's mobile initiative has failed to take off.

While investors might rave about the company's solid dividend yield, its almost non-existent debt, and cash-laden balance sheet, it shouldn't be forgotten that Nvidia's business is under siege from all angles.

It is true that Nvidia witnessed an 8% increase in revenue from its graphics processing unit (GPU) business in the second quarter, driven by the strength of its Kepler-based GPUs, but the fact that the overall PC market is declining cannot be overlooked. PC shipments slumped 8.6% in the September quarter, which means that Nvidia's GPU business is growing in a market that's actually shrinking.

However, the company witnessed robust growth in its workstation and server GPU segments, the Quadro and the Tesla, respectively. However, the desktop GPU business has been climbing at a slow pace, growing 3.9% in the previous quarter. And when we come to the segment that was expected to be the next big growth driver of Nvidia, the Tegra processors, things will look even worse.

A massive decline

Revenue from Tegra had slumped alarmingly in the second quarter, dropping a catastrophic 71% from the year-ago period to just $52.6 million. Well, then again, this is not at all surprising. The company lost its slot in those few major devices where it had managed to place its Tegra processor the last time -- HTC's flagship smartphone and the Google Nexus. Nvidia fell behind the curve in integrating 4G LTE into its processor and Qualcomm snapped up its key customers.

Google had selected Nvidia's Tegra for the first generation Nexus 7, and the chipmaker's happiness knew no bounds after it landed the design win. However, Google went with the Qualcomm Snapdragon Pro for the 2013 Nexus 7. This loss could be a major one for Nvidia, as it further pushes it back in mobile processors and strengthens Qualcomm's hold.

Behind the curve

Nvidia is still optimistic that its Tegra 4 processor will bring back its mobile glory, and the drop in shipments in the second quarter was due to a transition from Tegra 3 to the newer version. But, going back in time, one would see that this is not the first time that transition is hurting Nvidia.

Early last year, the transition from Tegra 2 to Tegra 3 had hurt sales. Well, when you release a chip and then again you state that you're going to release a better one with LTE, why will customers buy the older one! The company seems to have tinkered too much with the Tegra, and the fact that its 4G integrated chip has been late to the market has handed the initiative to Qualcomm.

Not enough firepower

So, while Nvidia CEO Jen-Hsun Huang had called the second quarter a trough for Nvidia's Tegra business, I doubt that it'll be able to succeed much in mobile, as long as it doesn't land serious design wins. And that hasn't been the case so far; in fact, as mentioned earlier, Nvidia has lost key accounts. Google moving to Qualcomm for the Nexus wasn't because of a Tegra transition, but probably because Qualcomm offered the better chip when Google needed it.

Google wouldn't have waited for NVIDIA to integrate LTE into its chip, and given the fact that the Snapdragon 800 outpaced the Tegra 4 in GPU performance, things don't look rosy for Nvidia going forward. Moreover, management's optimism regarding a ramp up of Tegra 4 in the current quarter seems based on tablets from the likes of Asus, Toshiba, and Hewlett-Packard, which isn't exactly something to be too excited about.

And these design wins would seem mediocre when you stack them up against Qualcomm's fifty design wins for the Snapdragon 600 and 800 processors. Considering Qualcomm's hegemony in the mobile baseband market and its cutting-edge innovation, it remains to be seen if the 4G modem-integrated Tegra 4i can succeed.

So, with Nvidia's famed Tegra initiative faltering, the company is now effectively dependent on its traditional GPU business for growth, which doesn't bode well since overall revenue declined in the previous quarter as Tegra slumped. And even there, the competition is present as the likes of Intel would provide a fight to Nvidia's GRID data center initiative with its own "Reimagine the Data Center."


Nvidia's guidance for the third quarter was a disappointment, and even if the company achieves the mid-point of its revenue guidance, i.e. $1.05 billion, it would still be a 12.6% decline from last year. The bottom line is that Nvidia is in trouble and investors can do better by putting their money somewhere else. If the company's outlook once again turns out to be disappointing, much of the gains that Nvidia has seen this year could be erased.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.