Nvidia's Graphic Growth Story

1/26/2015


  Recent Price
$20
  Dividend
$0.34
  Yield
1.7%
  P/E Ratio
16
  Shares (millions)
558
  Long-Term Debt as % of Capital
25%
  52-Week Price Range
$21.25 - $15.32

About 75% to 80% of Nvidia's ($20; NVDA) revenue comes from semiconductors that power graphic displays for personal computers. In recent years, Nvidia has managed to grow sales in the shrinking PC market, even as it diversifies into such new areas as mobile devices and data centers.

An additional revenue lane has opened up, as Nvidia accelerates its expansion into automobiles. In October, Nvidia announced a contract to supply semiconductors for navigation and entertainment systems in vehicles made by Honda Motor ($31; HMC). It has similar deals with Volkswagen ($44; VLKAY), Audi, and BMW. Nvidia imagines a not-too-distant future when its semiconductors will power displays in mirrors, seats, and dashboards that recognize road signs, pedestrians, and other vehicles.

Nvidia, offering solid growth prospects, an attractive valuation, and robust cash position, is a Buy and a Long-Term Buy.

Business breakdown

Nvidia relies on Taiwan Semiconductor Manufacturing ($23; TSM) to produce most of its semiconductor wafers, then uses other companies to assemble, test, and package. This agreement lets Nvidia escape the costly treadmill of constantly upgrading semiconductor equipment and foundries. But it also leaves Nvidia vulnerable to capacity shortages, such as the one that crimped operating results in the April 2012 quarter.

Nvidia's graphics processing units (GPUs) contain billions of transistors; most GPUs are used in personal computers. One obvious application for GPUs (81% of Nvidia's revenue in the nine months ended October) is in video games, a $100 billion market. GPUs also improve the design experience for architects, and researchers use the technology to forecast the weather, price financial derivatives, and map the human genome. Nvidia's graphics processors even power special effects used in Hollywood movies.

The company's Tegra processor (14%) powers smartphones, tablets, and automobile infotainment systems. You can also find it in televisions, set-top boxes, and gaming devices. Sales of this product jumped 75% in the nine months ended October.

To resolve a patent dispute, Intel ($36; INTC) agreed in 2011 to pay Nvidia $1.5 billion over six years though a cross-licensing pact that so far has generated roughly 6% of Nvidia's annual revenue.

Free cash flow has risen in three straight quarters and totaled $517 million in the 12 months ended October, up 10%. Since October 2012, Nvidia has returned 136% of free cash flow to investors through dividends and stock buybacks. Net cash exceeds $5 per share, giving Nvidia ample flexibility to maintain or accelerate its aggressive capital deployment.

Conclusion

Peeking ahead to fiscal 2016, Nvidia is expected to grow per-share profits 8% to $1.43 on 5% revenue growth. The stock trades at 14 times estimated profits, a 20% discount to the median for S&P 1500 semiconductor stocks. The stock's trailing P/E ratio of 16 is below its five-year average of 21.

An annual report for Nvidia Corp. is available at 2701 San Tomas Expressway, Santa Clara, CA 95050; (408) 486-2000; investor.nvidia.com.

NVIDIA
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Oct '14
0.39
vs.
0.26
16%
20.15
-
16.77
17 - 14
Jul '14
0.30
vs.
0.23
13%
19.73
-
17.42
18 - 16
Apr '14
0.29
vs.
0.18
16%
19.46
-
15.32
20 - 15
Jan '14
0.32
vs.
0.35
3%
16.44
-
14.52
16 - 14
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
4.13
0.99
0.31
16.44
-
12.04
17 - 12
2013
4.28
1.17
0.08
16.90
-
11.15
14 - 10
2012
4.00
1.19
0.00
26.17
-
11.47
22 - 10
2011
3.54
0.81
0.00
25.05
-
8.65
31 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
91
92
69
85
70
24
71

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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