Last Thursday, NVIDIA (NVDA) reported Q3 GAAP EPS of 29 cents. This surpassed analyst estimates by more than 10%. The company is on pace to report earnings of approximately $1/share for the fiscal year ending in January, demonstrating strong growth from EPS of 65 cents in FY11. Furthermore, analysts expect NVIDIA to grow earnings at a 15% clip for the foreseeable future (note that analyst growth estimates are often inflated, though). The company also has a strong balance sheet, with $2.75 billion in cash and short term investments (roughly $4.50/share) and essentially no debt.
Over the past few years, NVIDIA has done a commendable job of repositioning itself for tomorrow's market. IT has closed down its chipset business, which was suffering from legal wrangling with Intel (INTC), while building a new and fast-growing business selling mobile applications processors (the Tegra series). This has allowed NVIDIA to remain on the cutting edge of mobile technology, which is a huge growth industry. NVIDIA seems to be well ahead of its two closest competitors in the mobile space, Qualcomm (QCOM) and Texas Instruments (TXN).
The specifications for Qualcomm's next generation Snapdragon and TI's OMAP5 do not suggest that these chips will perform better than Tegra 3, despite having significantly later release dates. This has helped NVIDIA secure more design wins for the Tegra 3 chip, compared to Tegra 2. Furthermore, NVIDIA has a significant market opportunity with the release next year of Windows 8, which will be compatible with applications processors designed with the ARM (ARMH) architecture, like NVIDIA's Tegra line of processors.
In spite of these growth opportunities and its strong balance sheet, NVIDIA closed at $14.88 on Tuesday, less than 15 times projected earnings for the current fiscal year. Shares have essentially traded in line with the broader market since the company reported earnings, in spite of better than expected earnings and relatively strong guidance. This is becoming a theme with NVIDIA; for three straight quarters, the company has reported solid earnings and guidance, but has been punished by the market.
The cause of this underperformance, in my opinion, is poor investor relations. In recent quarters, the company has done a bad job of explaining its story and growth prospects to analysts and investors, and has been overly pessimistic in an attempt to offer conservative guidance. On the Q2 earnings conference call, CEO Jen-Hsun Huang predicted Tegra sales for Q3 to be "flattish"; revenue from that segment ended up coming in up 14% from the previous quarter!
For the current quarter, hand-wringing about not getting design wins for the Amazon (AMZN) Kindle Fire and a few Motorola Mobility (MMI) products overshadowed Huang's statement that he is confident Tegra 3 will sell significantly better than Tegra 2, particularly in mobile phones. Thus, Patrick Wang of Evercore Partners kept an underweight rating on NVIDIA "because he’s concerned that the company will struggle to deliver on plans to expand into mobile phones." Of course, it's possible that he has information the company does not have, but it seems more likely that the problem is NVIDIA's inability or unwillingness to "accentuate the positive", so to speak.
In the long run, investor relations doesn't matter. Companies have to "put up or shut up" by delivering earnings growth. But in the short-medium term, poor investor relations can lead analysts and investors to under-rate a company's prospects. This is what is currently happening at NVIDIA, and it creates a buying opportunity. If the company delivers on the guidance (.pdf) provided by CEO Jen-Hsun Huang in September for over $1 billion in Tegra sales next year, as well as $4.7-$5.0 billion in total sales, earnings will come in far ahead of analyst estimates. As this scenario plays out, NVIDIA shares have a good chance to rise to $20 or even higher.