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Summary

  • Nvidia reported strong Q2 earnings, with revenue and earnings growing in the double-digits.
  • AMD's GPU issues have not affected Nvidia, with its GTX gaming GPUs growing by 10%.
  • Growth opportunities including a growing PC market, the automotive market and the enterprise market should lead to strong earnings growth going forward.

Graphics chip company Nvidia (NASDAQ:NVDA) reported strong growth in its second fiscal quarter, with both revenue and net income rising in the double-digits year-over-year. The PC market improved during the quarter according to Gartner, and this no doubt helped Nvidia's results, but strong growth in both the mobile market and the enterprise market were also a factor. The stock rose around 8% the following day, and it seems that the troubles that rival Advanced Micro Devices (NYSE:AMD) is currently struggling with aren't negatively affecting Nvidia.

Earnings overview

Here is a table of the relevant GAAP figures from Nvidia's earnings report:

($ in millions except EPS)

Q2 FY15

Year-over-year

Revenue

$1,103

+13%

Gross margin

56.1%

+30 bps

Operating expenses

$456

+4%

Net income

$128

+33%

Diluted EPS

$0.22

+38%

Earnings were able to grow much faster than revenue thanks to Nvidia's efforts to keep operating expenses down. OPEX grew by just 4% year-over-year, much slower than the 13% revenue growth, and this contributed to the massive rise in net income.

One reason why Nvidia has been able to keep costs down is its recent consolidation of graphics architectures. The Tegra line of mobile processors were previously based on a distinct architecture, different from the architecture behind Nvidia's PC GPUs. With the most recent version of Tegra, the Tegra K1, Nvidia has moved its mobile processors to the same line of PC architectures, and this allows Nvidia's R&D to have a narrower focus, leading to efficiencies and lower relative costs.

Nvidia's GPU business, which is comprised of products aimed at the PC and the enterprise, grew by 2% year-over-year, with gaming GPUs under the GTX brand growing by 10%. Nvidia's enterprise products also grew sequentially, according to the company's conference call, including Quadro, Nvidia's professional graphics product, Tesla, aimed at high-performance computing, and GRID, Nvidia's GPU virtualization platform.

Nvidia's mobile Tegra business grew by 200% year-over-year, a rapid rise helped by sales from the same period last year being depressed. Nvidia has recently shifted the focus of its mobile business away from being a general-purpose supplier and toward specialization in key areas. One of those areas, automotive, grew by 74% year-over-year and auto makers are increasingly choosing Nvidia to power in-car displays.

Strong guidance and future opportunities

Nvidia expects third quarter revenue to come in at $1.2 billion, a nearly 14% rise year-over-year. Gross margin is expected to decline sequentially to between 55.2% and 55.5%, driven by continued growth of Tegra, which carries lower gross margins than the company average. GAAP operating expenses are expected to be $463 million, a 4.5% year-over-year increase, and the difference between OPEX growth and revenue growth should lead to earnings growth which again outpaces revenue growth.

All of Nvidia's markets are growing, and the company is avoiding some of the pitfalls that is plaguing AMD. During AMD's earnings report, the company reported both a sequential and year-over-year decline in its discrete GPU sales. According to Nvidia, the PC gaming market is growing, so AMD's poor results are somewhat surprising. The strong demand for Nvidia's higher-end GTX gaming GPUs is a good indication that AMD is unable to win any market share from Nvidia, and that Nvidia may actually be winning market share from AMD.

The enterprise market is also a source of growth for Nvidia. The world's 15 most energy efficient supercomputers are all powered by Nvidia's Tesla GPUs, and given that Nvidia's proprietary CUDA platform is used to harness the power of Tesla, there is a stickiness to Nvidia's enterprise products that should help the company maintain its market share going forward.

Growth in the mobile market exploded during the second quarter, and Nvidia has made great progress in creating markets for its mobile Tegra chips. In the automotive market, Tegra can be used for both in-car displays and driver assistance features, and Nvidia is aiming to make its GPUs the brains behind the autonomous cars of the future.

Google's Project Tango, a mobile device which uses sensors to create a 3D map of the environment in real-time, also is a potential source of growth for Nvidia's Tegra. The latest Tango device is powered by Nvidia's Tegra K1, and LG plans to bring a consumer version to market in 2015.

Nvidia's strong guidance isn't surprising given the slew of growth opportunities, and with expenses being kept in check, earnings can continue to rise significantly going forward.

Conclusion

Nvidia reported solid second quarter earnings, and any concerns that AMD's GPU issues would affect Nvidia seem to have been laid to rest. Nvidia is an example of a company that does one thing and does it well, a contrast to AMD's scattershot approach, and the growth opportunities available to the company should allow earnings to grow rapidly in the coming years.

Source: Nvidia: Strong Earnings, Ample Growth Opportunities