Analysts' Choice: Nvidia Plays High-End Game

10/19/2015


  Recent Price
$27
  Dividend
$0.39
  Yield
1.4%
  P/E Ratio
18
  Shares (millions)
556
  Long-Term Debt As % Of Capital
25%
  52-Week Price Range
$26.56 - $16.82

Unless you play a lot of video games, you probably pay little attention to your computer's graphics card. These tiny devices provide memory for images that display on the screen, as well as a processing unit that translates electronic data into visuals.

To the gamer, the graphics card represents the heart of a computer system. Nvidia ($27; NVDA) keeps those hearts pumping. Of course, a graphics semiconductor maker cannot exist on games alone. While gaming remains Nvidia's most important end market, the company says visual computing is gaining importance marketwide, creating opportunities in cloud computing, enterprise graphics, and autonomous vehicles.

Since early August, when Nvidia posted better-than-expected results for the July quarter and boosted its October-quarter guidance, the shares have jumped 34%. Despite those gains, Nvidia trades at 20 times expected year-ahead earnings, comparable with the average for its semiconductor peers, few of which boast such well-defined growth potential. Nvidia, yielding 1.4%, is a Long-Term Buy.

Growth not just a game

In the past, Nvidia shares often suffered when personal-computer demand weakened. But after years of expanding in other directions, the company no longer depends heavily on PCs. In the July 2015 quarter, graphics cards for computers and mobile devices accounted for just 9% of revenue, down from 42% in fiscal 2013 ended January. In contrast, revenue share from products for gaming, business graphics, and automobiles rose to 85% from 52% in fiscal 2013.

Gaming accounted for about 45% of Nvidia's sales in fiscal 2015 ended January. PC Gamer magazine in July rated Nvidia's GeoForce GTX 970 the best graphics card, calling it "the price/performance champion."

Rather than pursue the hoi polloi, Nvidia prefers to focus on high-end gamers. We expect Nvidia to remain at the head of the charge with nascent technologies such as ultra-high definition and virtual reality. At the end of July, 65 million gamers used Nvidia's GeoForce platform, up from 38 million a year earlier.

Over the last 12 months, Nvidia posted gains of 9% in sales, 15% in per-share profits, and 32% in operating cash flow. While gaming deserves much of the credit for that growth, sales of products for data centers and automobiles have grown even faster.

As of July, Nvidia:

• Worked with more than 3,300 companies on speech recognition, image analysis, and translation.

• Collaborated with more than 50 companies on autonomous driving.

• Provided graphics virtualization products and services to 300-plus large corporations, more than triple the customer base from a year earlier.

Conclusion

In the last 10 quarters, Nvidia has spent more than $1.8 billion on share repurchases, reducing the share count 11%. During the same period, the company raised its dividend twice, most recently a 15% hike in May. Spending on buybacks is slowing, but we expect dividend growth to continue.

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

NVIDIA
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jul '15
0.34
vs.
0.30
5%
22.88
-
19.09
16 - 13
Apr '15
0.33
vs.
0.29
4%
23.60
-
18.94
17 - 13
Jan '15
0.43
vs.
0.32
9%
21.25
-
19.08
16 - 15
Oct '14
0.39
vs.
0.26
16%
20.15
-
16.77
17 - 14
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
4.68
1.42
0.34
21.25
-
15.32
15 - 11
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
84
84
40
81
70
74
97

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


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