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How NVIDIA’s Operating Margin Could Overtake Intel’s

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NVIDIA’s higher ASPs drive profits  

In the preceding part of this series, we discussed how NVIDIA (NVDA) has been enjoying a strong gross profit because it has the power to command premium prices for its products while enjoying the cost benefits of node shrinking. But the effects of its higher ASP (average selling price) have also trickled down to the operating margin.

Operating margin 

NVIDIA’s non-GAAP (generally accepted accounting principles) operating profit rose 30% sequentially and 42% YoY (year-over-year) to $1 billion in fiscal 3Q18, equating to an operating margin of 38.1%. This represents a 3.5-percentage-point jump from the 34.7% margin it reported in fiscal 2Q18.

The company’s operating margin rose faster than its gross margin because its revenues rose faster than its operating expenses. Its revenues rose 18% sequentially, while operating expenses rose 7% sequentially.

NVIDIA’s operating margin is higher than Intel’s (INTC) likely because the former adopts a single-platform model, which generates higher returns. In this model, NVIDIA develops its GPU architecture and leverages it across various platforms, such as gaming, data center, automotive, and professional visualization, charging a different price for every platform.

Although Advanced Micro Devices (AMD) is nowhere near Intel and NVIDIA in terms of profits, it is gradually improving its operating margin by targeting high-end products that have higher margins.

NVIDIA expects its operating margin to fall to 37.4% in fiscal 4Q18 because it expects its revenues to remain unchanged, but it expects its operating expenses to rise 5% sequentially. Other analysts expect the company to report an operating margin of 39% in fiscal 4Q17 and to see 10% sequential revenue growth.

EPS

The profitability effect increased further at the EPS (earnings per share) level as the company repurchased some shares. In fiscal 3Q18, NVIDIA’s non-GAAP EPS (earnings per share) rose 32% sequentially to $1.33, beating the consensus estimate of $0.94.

The Wall Street analysts expect NVIDIA to report EPS of $1.15 in fiscal 4Q18. But given the company’s past-two-year history of beating the EPS estimate by an average of 20%, some expect the company to report an EPS of as high as $1.38 in fiscal 4Q18.

Next, we’ll look at the performance of NVIDIA’s products.

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