Last week, NVIDIA Corporation (NASDAQ:NVDA)
reported fourth-quarter and full-year fiscal 2013 earnings that beat
analyst estimates on both revenue and earnings per share. Unfortunately,
the market released an indifferent sigh as NVIDIA promised better days
to come while at the same time providing light first-quarter revenue
guidance of $940 million. As a result, though the numbers were solid,
shares of NVIDIA seem to be stuck in neutral.
So what does the remainder of this year hold for the graphics chip specialist?
A year of records
Despite what the multiyear underperformance
of its stock might indicate, fiscal 2013 was a banner year for NVIDIA.
In fact, the company appears to be firing on all cylinders after setting
multiple records during the year, including new high marks for annual
revenue of $4.3 billion and GAAP gross margin of 52%.
NVIDIA also changed its financial
reporting segments to better reflect its two primary businesses going
forward: graphics processing units and Tegra processors.
To be sure, at first glance NVIDIA's GPU
business looks weak after growing a meager 2% from the year-ago period.
However, excluding chipset sales, which the company exited last year,
GPU revenue actually grew a more respectable 8% as NVIDIA pulled the rug
out from under struggling competitor Advanced Micro Devices, Inc. (NYSE:AMD),
largely thanks to increasing GPU market share from 53% to 65%. In
addition, NVIDIA also grew its notebook share from 47% to to a
near-record 66%.
When all was said and done, Tegra,
Tesla, and notebook GPUs all set new revenue records for the company,
driven largely by 30% Tegra growth as Tegra 3 products sold into tablets
and smartphones grew 50% from the year-ago period.
Throwing in the towel
Even so, as fellow Fool Rich Smith pointed out
last week, that still wasn't enough for analysts at Needham. They'd
maintained a "buy" rating on NVIDIA since November 2011, but downgraded
its shares to "hold" following the announcement.
Why would they give up after pounding
the table for more than a year? In addition to NVIDIA's underwhelming
first-quarter guidance, Needham not only cited rising operating expenses
outpacing revenue growth, but also complained of a "lack of meaningful
Tegra growth" due to "limited traction in smartphones" and "share loss
to QUALCOMM, Inc. (NASDAQ:QCOM) in Android-based tablets."
Connecting to new markets
Naturally, NVIDIA management did their best to circumvent these
complaints during its earnings conference call, first pitching the
operate expense increases as necessary investments to support the
company's key growth strategies going forward. Sure enough, management
stated the bulk of last year's operating expenses were attributable to
employee and supporting infrastructure costs, as NVIDIA increased its
total staff by more than 11% by adding 840 employees during the year. In
addition, NVIDIA is keeping its current employees happy by initiating
the company's first-ever 401(k) match -- an admirable move, as so many
other companies have abandoned 401(k) matches in efforts to curb costs.
In addition, and to appease analysts'
never-ending lust for more growth in the Tegra segment, NVIDIA was also
quick to note its yet-to-be-released Tegra 4 processor already has more
design wins than the Tegra 3 had in total. This supports NVIDIA's
expectations for the segment to grow at a 50% clip for the foreseeable
future, and, as fellow Fool Steve Heller suggested recently, much of that growth could be had at the expense of Qualcomm in the smartphone market.