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NVIDIA (NVDA) Stock Up on Q1 Earnings Beat, Guides Well

Shares of NVIDIA Corp. NVDA went up 7.4% in after-hours trading yesterday, after the company reported better-than-expected first-quarter fiscal 2017 results. Also, an encouraging second quarter guidance positively impacted the share price.

The company posted earnings (including stock-based compensation but excluding other one-time items) of 39 cents per share for the quarter, up on a year-over-year basis. The Zacks Consensus Estimate was pegged at 31 cents.

Revenues

Revenues not only increased 13.4% year over year to $1.305 billion but also surpassed the Zacks Consensus Estimate of $1.267 billion. The year-over-year increase was primarily due to better-than-expected growth in GPUs gaming platform, high-performance computing, datacenter and Tegra automotive platforms.

Revenues from GPU business increased 15% year over year to $1.08 billion, driven by strength in GeForce GPUs and Gaming revenue. Revenues from Gaming GPU increased 17% on a year-over-year basis. Revenues from datacenter (including Tesla and Grid) came in at $143 million, up 63% on a year-over-year basis.

Tegra processor revenues on the other hand increased 10% from the year-ago quarter and came in at $160 million, primarily due to better-than-expected growth in Tegra development services and automotive. Automotive revenues for the quarter came in at $113 million, up 47% year over year.

Margins

NVIDIA’s adjusted gross margin (including stock-based compensation but excluding other one-time items) expanded 158 basis points (bps) from the year-ago quarter to 58.3%. In dollar terms, gross profit came in at $761 million, up 16.5% from the year-ago quarter, primarily due to strength in Maxwell GPU gaming platform and a higher revenue base.

Adjusted operating expenses increased 5.1% from the year-ago quarter to $492 million, as the company continued to invest in sales, general and administrative activities and higher research and development expenses. As a percentage of revenues, operating expenses however decreased 296 bps from the year-ago quarter to 37.7%.

NVIDIA’s adjusted operating margin was up 454 bps from the year-ago quarter to 20.6%, reflecting growth in its GeForce GTX GPU business and lower operating expenses as a percentage of revenues. In dollar terms, adjusted operating income increased from $185 million to $269 million.

Balance Sheet & Cash Flow

NVIDIA exited the quarter with cash, cash equivalents and marketable securities of $4.75 billion compared with $5.04 billion in the previous quarter. Free cash flow in the quarter came in at $254 million, while cash flow from operations was $309 million. NVIDIA’s total debt (including current portion) was $1.43 billion.

During the quarter, the company paid quarterly dividend totaling $62 million. NVIDIA also announced a quarterly dividend of 11.5 cents per share (payable on Jun 20, 2016). During the quarter, the company entered into a $500 million accelerated share repurchase program.

Moreover, the company stated that it expects to return around $1 billion to shareholders through dividends and share repurchase for fiscal 2017.

Guidance

For the second quarter of fiscal 2017, NVIDIA expects revenues of approximately $1.35 billion (+/-2%). The Zacks Consensus Estimate is pegged at $1.276 billion.

Non-GAAP gross margin is expected to be 58% (+/-50 bps). Non-GAAP operating expenses are expected to be approximately $445 million. Non-GAAP tax rate is expected to be 20% (+/-1%).

Recommendation

NVIDIA posted better-than-expected first quarter fiscal 2017 results and provided encouraging second-quarter revenue guidance. Also, revenues increased year over year, primarily due to growth in GPUs gaming platform, high-performance computing, datacenter and Tegra automotive platforms.

Furthermore, we believe that NVIDIA’s innovative product pipeline and strength in gaming and high-end notebook GPUs keep it well positioned. We also believe that the higher adoption of NVIDIA’s Tegra processors could act as a catalyst, going forward.

Nonetheless, competition from the likes of Intel INTC and QUALCOMM Inc. QCOM remains a near-term headwind. 

NVIDIA has a Zacks Rank #3 (Hold).

Investors may consider TiVo Inc. TIVO from the tech space, sporting a Zacks Rank #1 (Strong Buy).

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