NVIDIA - Full Stock Analysis
Updated
This is my first brief overview of a companies financial health and what I derive from its latest 10-K reports. I am open to discussion about any of the topics and encourage people to say where my thoughts might differ to theirs. I hope you enjoy!
Balance Sheet
Cash and Cash Equivalents –increased from the prior year from $1,776,000,000 to $4,002,000,000. I would be hesitant to recommend that NVIDIA is generating so much cash. Over the last 6 years NVIDIA’s average purchases in marketable securities has been increasing towards $3 billion however for year ending Jan 2018 they only made purchases of $36,000,000. Perhaps these funds will be used in the next financial year, but it is worth noting it seems a lot better than it initially is. Looking at the statement of cash flows will help understand this.
Marketable Securities – decreased from $5,032,000,000 to $3,106,000,000. If NVIDIA did decide to invest the $3 billion mentioned earlier, back into short term marketable securities, it would be sitting at around $5 billion and cash would be down to $1 billion. Here you have NVIDIA not buying any more marketable securities and retiring of existing securities. Cash is likely to have been a lot lower if they followed their previous trajectory.
Accounts Receivable – increased from $826,000,000 to $1,265,000,000 (53.1%). Around 6-7 years ago accounts receivable was around 9.5% of revenue generated and now it is 13.02%. If we extrapolate out the numbers, you can see that the ratio of account receivables to revenue increases to a ratio that would be cause for concern. When account receivables growth outpaces revenue growth questions need to be asked why. One of the possibilities for this increase is that NVIDIA needs to offer longer credit terms for customers to remain competitive. If this is the case, then it is a concern for NVIDIA’s competitive advantage. In a low competitive environment, they would be able to keep this line on the balance sheet low. It could also mean that they are having trouble receiving payment from customers due to the recent decline in cryptocurrency, in which case allowances for bad debts will need to be increased to accommodate this. Major competitor Intel’s accounts receivable to revenue sat a much more comfortable 8.9% and AMD at 7.5%. This ratio is definitely one to keep an eye on as NVIDIA heads into the future as it could cause harm to its competitive advantage.
Image of example case of Accounts Receivable: gyazo.com/8053c8b48c369319ba472fb667b48ee1
Inventories – Having a low inventory can be the sign of an efficient business that can meet it’s demands without the costs associated of inventory (holding, security and opportunity). Inventories only increased 0.0025% to $796,000,000 or Inventory/Revenue Ratio of 0.082 which was better than Intel and AMD’s ratios. Inventory over the last 6 years has grown by 11.2% which is less than the revenue growth meaning they are clearing products and moving away from a primarily tangible goods-based business, a sign of a healthy company. It is worth noting that inventory is likely to have a build through 2018 and into 2019 due to the cryptocurrency mining industry, however this will not affect the company in the long term and so, any effects felt in the stock market could provide useful entry points depends on what price NVDA stock trades at.
Property, Plant and Equipment – increased by 91.3% to $997,000,000. The reason for this large increase was down to the purchase of a built-to-suit building at $335,000,000 and will be used over the next 25-30 years. This line consists of land valued at $218,000,000 which was purchased back in 2008 and was not subsequently revalued due to the recording on the balance sheet at cost. If we take a conservative increase in local commercial property of 6% over the last 9 years this adds $150,000,000 in land valuation, something we might expect if we were to sell the land in reasonable market conditions. The fact that this land was bought during a crisis would suggest that management had a level head and were hunting for a fire-sale adding value to the company. An interesting figure to consider is NVIDIA’s property, plant and equipment/adjusted revenue ratio. The idea behind this is to see how effective its long-term assets are being used to generate revenue, the more efficient the business the smaller this ratio should be. The adjusted revenue figure is the sum of inventory and revenue for the year as the inventory has been created by these long-term assets and will be expected to be sold in the near future. NVIDIA’s PPE/adjusted revenue ratio comes to 0.095 (997/(9714+796) which when compared to Intel’s 0.595 has a huge advantage. NVIDIA looks to be more efficient in utilising its assets and will also have less attributed to depreciation and amortization in the future. There will however be a cost to NVIDIA in that it sources out aspects of its operations that may be kept within the organisation, giving to a potentially larger item somewhere else on the financial statements.
Goodwill – Is an interesting item within the balance sheet and one that needs to be scrutinised further. Goodwill is currently at $618,000,000 or 5.5% of total assets which is a relatively lower percentage than its major competitors. Although this is a small amount any unusual dealings need to be explained. In this goodwill calculation is a value of $271,000,000, 43.8% of goodwill, assigned to Icera. Icera was a corporation bought by NVIDIA back in 2011 and subsequently wound-down in 2016. I have looked through various items from 2016 through to the latest 10-K report and cannot find any impairment or write-down associated with Icera. This could be down to a knowledge gap in accounting techniques however I thought I would exclude this item from my adjusted goodwill figure of $347,000,000. My reasoning is that the income would have already been attributed to the parent organisation so would not need to be included and NVIDIA was unable to find a serious buyer, meaning there is little value or economic use of Icera.
Accounts Payable – is at 6% revenue ($596,000,000) which is lower than the 8.3% 6 years ago. It has been a steady and consistent reduction which shows me NVIDIA has been very careful in adding debt to the company. A high or low accounts payable to revenue ratio can be both good or bad, too little and it might not be utilising its ability to obtain credit, too much and it increases its debt interest payment to negatively affect the competitive advantage it holds. I believe NVIDIA’s current 6% is enough considering that it holds $4,002,000,000 in cash and cash equivalents and therefore would not need the extra cash flow provided by having a large accounts payable figure. If NVIDIA did need to increase cash flow I would expect this item to increase and it is likely to be able to do this through its competitive advantage. As this item is already marked to fair value due to their short maturities and so, do not require adjusting.
Accrued And Other Current Liabilities – Interestingly this line has decreased from 14.4% of revenue 6 years ago to 5.5% in the latest report. The main contributor 6 years ago was deferred income which means that the business received cash in advance of delivering the products/services. From a cash flow stand point this can be seen as good because they are receiving cash to then use and put into other opportunities. A firm needs to be careful if they have a lot of deferred income as they will still need resources to produce the goods/services. If they have used resources so that there is not enough to provide the sold goods/services then the business could get into a lot of trouble. Thankfully this figure has decreased and so too the probability of not having enough resources to deliver already sold items. It is worth noting that the need for a large amount of deferred income is less as NVIDIA’s cash and cash flow are healthy. One other way of looking at this item is that if deferred income is decreasing, it means there is less servicing/membership type income which could be worrying. As this is a small amount of revenue it is not a cause for concern like it would be for other industries.
Convertible Short-Term Debt – is at a low of $15,000,000, down from $796,000,000 the year prior. In 2014 $1,500,000,000 was issued in convertible bonds. This debt issue would have been useful for NVIDIA as it would raise capital whilst keeping the cost of capital relatively low and it would have had the advantage of deferring the dilution of current stockholder equity. In this time it will have benefitted from an increase in income which will then be used to purchase shares back, partially or completely offsetting the effect from converted debt. This can be seen in the outstanding shares figure which since the issuance of the convertible debt in 2014 has gone from 595,000,000 shares outstanding to 632,000,000 in the latest report.
Total Current Liabilities - has remarkably gone from $976,000,000 6 years ago to $1,153,000,000, a 2.88% increase year on year. NVIDIA has been sensible in taking on debt which is great as it means lower costs associated with debt, further increasing NVIDIA’s ability to generate larger cash flows in the future. With a current ratio of 0.125 or even an adjusted current ratio of 0.162* I feel that NVIDIA could be looking at more opportunities to put the capital to use, perhaps more into the AI and auto industry as having 63.2% of your total assets in low yield opportunities is not a way to increase durable competitive advantage.
*My adjusted ratio included cash and cash equivalents and marketable securities. The reason is that this is the potential cash available to the business. Items such as accounts receivable, inventories and other prepaid expenses are the cost of doing business and would not represent cash to be used in an investment, or from what I believe it would not.
Long-Term Debt – was at $1,985,000,000 which is just $2,000,000 more than the year previous. It consists of two bond issues made during the fiscal year 2017. $1,000,000,000 2.2% notes due in 2021 and $1,000,000,000 3.2% notes due in 2026. I like that NVIDIA has raised a large amount of capital whilst long-term interest rates continue to stay relatively low, especially with US Federal Reserve on a path to raising rates. It would have also been possible for NVIDIA to raise funds through an equity issue however for the sake of current stockholders it is much better they have not done this. Debt interest is also deductible which is advantageous. Prior to 2013 NVIDIA had little to no long-term debt financing however it has done it a few times over the last 5 years. Although the initial long-term debt issuance has been paid, I would not want to see a constant paying down and re-issue of long-term debt as this is going to add further costs to NVIDIA and dampen its competitive advantage. It is worth noting that NIVIDIA has been able to reduce both its long-term debt to total assets and its long-term debt to equity ratios of the last 15 years which would suggest it is attempting to reduce its long-term financing. I believe the next few years will be important to see how well they do at this.
Other Long-Term Liabilities – jumped from $277,000,000 to $632,000,000. The biggest increase was due to income tax payable which increased because of the one-time transition tax implemented by Donald Trump, allowing businesses to repatriate foreign earnings at a lower than normal rate. Nothing is out of the normal with this and has been done by the majority of US companies with significant foreign earnings.
Total Long-Term Debt – It is important than when looking at this line we look at multiple years and how the debt has progressed, if we do not it is likely to give an unrealistic idea as to the company’s competitive advantage. NVIDIA is a good example of this. In the fiscal year 2013 NVIDIA had a total debt to total asset ratio of 0.247 and in 2014 it went to 0.385. This is also the same with the total debt to total equity. In 2013 it was 0.328 meaning for every $1 in equity you had $0.38 in debt, and this increased to 0.627 in 2014. This was mostly due to the beginning of long-term debt financing by NVIDIA.
From 2014 up to the latest report there has been a steady reduction in these ratios, something that was more of a necessity than an option. The total debt to total asset ratio for fiscal year 2018 was 0.335, a long way off its 2013 figure but much better than 2014. This also applies to the total debt to total equity ratio that is now at 0.504. These debt ratios have been on the right track, however if they start to get worse in the coming years it could be a large cause for concern and could cause long-term investors to stay away.
Income Statement
Revenue – has grown strong over the last 6 years at a rate of 14.63% per annum. This would suggest that there has been a steady increase in demand over this period. Year ended 2018 saw NVIDIA’s revenue jump 40.58% from the year previous, likely down to an increase in demand for GPU’s for cryptocurrency mining. This is not likely to be sustained and the cryptocurrency mining industry has already declined significantly from its peak. If revenue continued to grow at the same pace for the last 6 years it would still represent a health company. Investments and expansion into the AI industry will also open larger revenue streams.
Cost of Sales – is shown as 40.07% of revenue ($3,892,000,000) however I have added research and development costs into this to arrive at cost of sales being 58.56% of revenue ($5,689,000,000). I believe that research and development should be added as this cost is used to technically create the product, without it would mean there is no product to produce. After adjusting for the new figure gross profit margins decline from 59.93% to 41.44%, an incredibly strong figure that shows NVIDIA has the competitive advantage needed to beat competitors. Remarkably, the adjusted cost of sales margin has decreased from around 75% to 59% in the last 6 years. This is likely due to increased efficiency in manufacturing and more competitive products being developed allowing NVIDIA to charge more than their competitors.
Research and Development – Sits at 18.50% of revenue and over the last 6 years has been around 25-30%. This decline as a percentage of revenue is likely to be the large jump in revenue. R&D spending can increase again to move back in line with previous figures or revenue to decline. I am expecting somewhere in the middle due to NVIDIA’s products having a strong demand through various customer demographics. For comparison, Intel’s R&D spending over the same period has been around 20-21%. NVIDIA has been investing slightly more and revenues have been growing at a much faster pace, possibly down to this.
Sales, General and Administrative – costs have been steady as a percentage of total revenue between 8-10%. The fact that this has been steady shows that NVIDIA is able to keep a lid on operations even with competitors being a factor. Even during the financial crisis and NVIDIA’s revenue taking a 16% fall their SG&A costs were maintained around the 10% level.
Interest Income and Expenditure – what is interesting about NVIDIA is its ability to have interest income greater than interest expense. Not only do they have a low portion of debt to revenues and assets, they are generating returns on their cash.
Net Income – growth has been exceptional for the last 6 years growing at 30% year on year. This growth has been from several factors such as the rise of gaming and the need for high performance chips. Cryptocurrency has been a contributing factor so the large growth too. With the cryptocurrency market fading other revenue streams will need to be explored if 30% a year is to be maintained at a minimum for the foreseeable future. Thankfully the rise of artificial intelligence will help to generate revenue for NVIDIA. With this market being in its infancy, there is huge growth potential and NVIDIA is in an advantageous position with its higher quality chips compared to competitors. Tesla, one of NVIDIA’s customers that used their chips in the autonomous driving vehicles of Tesla has decided to make its own chips. Although this is not an ideal situation, it forces NVIDIA to be more competitive with its products, otherwise it will lose poll position. NVIDIA has several manufacturers that already use its chips, so it is less of a concern. As the AI industry starts to encompass all parts of life, NVIDIA will benefit hugely. Net Income as a percentage of total revenue has seen a steady increase over the period from around 13% to 32% for year ended Jan 2018. This represents how strong NVIDIA is in being able to charge a healthy premium for its products, expertise and ability to keep expenses and poor decisions to a minimum.
Earnings Per Share – came in at $4.82 per share (diluted). At current prices at $147 per share that represents a return of 3.27%. I have not adjusted the number of shares (diluted) as NVIDIA has not been issuing or buying back many shares over the last 6 years (average is 605,000), if they were significantly buying shares back I would have adjusted this number due to the EPS figure showing “phantom” profits.
If I were to purchase NVIDIA I would be looking at around the $85 area and lower. This would be based on its current growth in earnings, assets, equity and debt. This price would also accommodate a slow down in growth of the economy i.e. less revenue being generated by NVIDIA.
Balance Sheet
Cash and Cash Equivalents –increased from the prior year from $1,776,000,000 to $4,002,000,000. I would be hesitant to recommend that NVIDIA is generating so much cash. Over the last 6 years NVIDIA’s average purchases in marketable securities has been increasing towards $3 billion however for year ending Jan 2018 they only made purchases of $36,000,000. Perhaps these funds will be used in the next financial year, but it is worth noting it seems a lot better than it initially is. Looking at the statement of cash flows will help understand this.
Marketable Securities – decreased from $5,032,000,000 to $3,106,000,000. If NVIDIA did decide to invest the $3 billion mentioned earlier, back into short term marketable securities, it would be sitting at around $5 billion and cash would be down to $1 billion. Here you have NVIDIA not buying any more marketable securities and retiring of existing securities. Cash is likely to have been a lot lower if they followed their previous trajectory.
Accounts Receivable – increased from $826,000,000 to $1,265,000,000 (53.1%). Around 6-7 years ago accounts receivable was around 9.5% of revenue generated and now it is 13.02%. If we extrapolate out the numbers, you can see that the ratio of account receivables to revenue increases to a ratio that would be cause for concern. When account receivables growth outpaces revenue growth questions need to be asked why. One of the possibilities for this increase is that NVIDIA needs to offer longer credit terms for customers to remain competitive. If this is the case, then it is a concern for NVIDIA’s competitive advantage. In a low competitive environment, they would be able to keep this line on the balance sheet low. It could also mean that they are having trouble receiving payment from customers due to the recent decline in cryptocurrency, in which case allowances for bad debts will need to be increased to accommodate this. Major competitor Intel’s accounts receivable to revenue sat a much more comfortable 8.9% and AMD at 7.5%. This ratio is definitely one to keep an eye on as NVIDIA heads into the future as it could cause harm to its competitive advantage.
Image of example case of Accounts Receivable: gyazo.com/8053c8b48c369319ba472fb667b48ee1
Inventories – Having a low inventory can be the sign of an efficient business that can meet it’s demands without the costs associated of inventory (holding, security and opportunity). Inventories only increased 0.0025% to $796,000,000 or Inventory/Revenue Ratio of 0.082 which was better than Intel and AMD’s ratios. Inventory over the last 6 years has grown by 11.2% which is less than the revenue growth meaning they are clearing products and moving away from a primarily tangible goods-based business, a sign of a healthy company. It is worth noting that inventory is likely to have a build through 2018 and into 2019 due to the cryptocurrency mining industry, however this will not affect the company in the long term and so, any effects felt in the stock market could provide useful entry points depends on what price NVDA stock trades at.
Property, Plant and Equipment – increased by 91.3% to $997,000,000. The reason for this large increase was down to the purchase of a built-to-suit building at $335,000,000 and will be used over the next 25-30 years. This line consists of land valued at $218,000,000 which was purchased back in 2008 and was not subsequently revalued due to the recording on the balance sheet at cost. If we take a conservative increase in local commercial property of 6% over the last 9 years this adds $150,000,000 in land valuation, something we might expect if we were to sell the land in reasonable market conditions. The fact that this land was bought during a crisis would suggest that management had a level head and were hunting for a fire-sale adding value to the company. An interesting figure to consider is NVIDIA’s property, plant and equipment/adjusted revenue ratio. The idea behind this is to see how effective its long-term assets are being used to generate revenue, the more efficient the business the smaller this ratio should be. The adjusted revenue figure is the sum of inventory and revenue for the year as the inventory has been created by these long-term assets and will be expected to be sold in the near future. NVIDIA’s PPE/adjusted revenue ratio comes to 0.095 (997/(9714+796) which when compared to Intel’s 0.595 has a huge advantage. NVIDIA looks to be more efficient in utilising its assets and will also have less attributed to depreciation and amortization in the future. There will however be a cost to NVIDIA in that it sources out aspects of its operations that may be kept within the organisation, giving to a potentially larger item somewhere else on the financial statements.
Goodwill – Is an interesting item within the balance sheet and one that needs to be scrutinised further. Goodwill is currently at $618,000,000 or 5.5% of total assets which is a relatively lower percentage than its major competitors. Although this is a small amount any unusual dealings need to be explained. In this goodwill calculation is a value of $271,000,000, 43.8% of goodwill, assigned to Icera. Icera was a corporation bought by NVIDIA back in 2011 and subsequently wound-down in 2016. I have looked through various items from 2016 through to the latest 10-K report and cannot find any impairment or write-down associated with Icera. This could be down to a knowledge gap in accounting techniques however I thought I would exclude this item from my adjusted goodwill figure of $347,000,000. My reasoning is that the income would have already been attributed to the parent organisation so would not need to be included and NVIDIA was unable to find a serious buyer, meaning there is little value or economic use of Icera.
Accounts Payable – is at 6% revenue ($596,000,000) which is lower than the 8.3% 6 years ago. It has been a steady and consistent reduction which shows me NVIDIA has been very careful in adding debt to the company. A high or low accounts payable to revenue ratio can be both good or bad, too little and it might not be utilising its ability to obtain credit, too much and it increases its debt interest payment to negatively affect the competitive advantage it holds. I believe NVIDIA’s current 6% is enough considering that it holds $4,002,000,000 in cash and cash equivalents and therefore would not need the extra cash flow provided by having a large accounts payable figure. If NVIDIA did need to increase cash flow I would expect this item to increase and it is likely to be able to do this through its competitive advantage. As this item is already marked to fair value due to their short maturities and so, do not require adjusting.
Accrued And Other Current Liabilities – Interestingly this line has decreased from 14.4% of revenue 6 years ago to 5.5% in the latest report. The main contributor 6 years ago was deferred income which means that the business received cash in advance of delivering the products/services. From a cash flow stand point this can be seen as good because they are receiving cash to then use and put into other opportunities. A firm needs to be careful if they have a lot of deferred income as they will still need resources to produce the goods/services. If they have used resources so that there is not enough to provide the sold goods/services then the business could get into a lot of trouble. Thankfully this figure has decreased and so too the probability of not having enough resources to deliver already sold items. It is worth noting that the need for a large amount of deferred income is less as NVIDIA’s cash and cash flow are healthy. One other way of looking at this item is that if deferred income is decreasing, it means there is less servicing/membership type income which could be worrying. As this is a small amount of revenue it is not a cause for concern like it would be for other industries.
Convertible Short-Term Debt – is at a low of $15,000,000, down from $796,000,000 the year prior. In 2014 $1,500,000,000 was issued in convertible bonds. This debt issue would have been useful for NVIDIA as it would raise capital whilst keeping the cost of capital relatively low and it would have had the advantage of deferring the dilution of current stockholder equity. In this time it will have benefitted from an increase in income which will then be used to purchase shares back, partially or completely offsetting the effect from converted debt. This can be seen in the outstanding shares figure which since the issuance of the convertible debt in 2014 has gone from 595,000,000 shares outstanding to 632,000,000 in the latest report.
Total Current Liabilities - has remarkably gone from $976,000,000 6 years ago to $1,153,000,000, a 2.88% increase year on year. NVIDIA has been sensible in taking on debt which is great as it means lower costs associated with debt, further increasing NVIDIA’s ability to generate larger cash flows in the future. With a current ratio of 0.125 or even an adjusted current ratio of 0.162* I feel that NVIDIA could be looking at more opportunities to put the capital to use, perhaps more into the AI and auto industry as having 63.2% of your total assets in low yield opportunities is not a way to increase durable competitive advantage.
*My adjusted ratio included cash and cash equivalents and marketable securities. The reason is that this is the potential cash available to the business. Items such as accounts receivable, inventories and other prepaid expenses are the cost of doing business and would not represent cash to be used in an investment, or from what I believe it would not.
Long-Term Debt – was at $1,985,000,000 which is just $2,000,000 more than the year previous. It consists of two bond issues made during the fiscal year 2017. $1,000,000,000 2.2% notes due in 2021 and $1,000,000,000 3.2% notes due in 2026. I like that NVIDIA has raised a large amount of capital whilst long-term interest rates continue to stay relatively low, especially with US Federal Reserve on a path to raising rates. It would have also been possible for NVIDIA to raise funds through an equity issue however for the sake of current stockholders it is much better they have not done this. Debt interest is also deductible which is advantageous. Prior to 2013 NVIDIA had little to no long-term debt financing however it has done it a few times over the last 5 years. Although the initial long-term debt issuance has been paid, I would not want to see a constant paying down and re-issue of long-term debt as this is going to add further costs to NVIDIA and dampen its competitive advantage. It is worth noting that NIVIDIA has been able to reduce both its long-term debt to total assets and its long-term debt to equity ratios of the last 15 years which would suggest it is attempting to reduce its long-term financing. I believe the next few years will be important to see how well they do at this.
Other Long-Term Liabilities – jumped from $277,000,000 to $632,000,000. The biggest increase was due to income tax payable which increased because of the one-time transition tax implemented by Donald Trump, allowing businesses to repatriate foreign earnings at a lower than normal rate. Nothing is out of the normal with this and has been done by the majority of US companies with significant foreign earnings.
Total Long-Term Debt – It is important than when looking at this line we look at multiple years and how the debt has progressed, if we do not it is likely to give an unrealistic idea as to the company’s competitive advantage. NVIDIA is a good example of this. In the fiscal year 2013 NVIDIA had a total debt to total asset ratio of 0.247 and in 2014 it went to 0.385. This is also the same with the total debt to total equity. In 2013 it was 0.328 meaning for every $1 in equity you had $0.38 in debt, and this increased to 0.627 in 2014. This was mostly due to the beginning of long-term debt financing by NVIDIA.
From 2014 up to the latest report there has been a steady reduction in these ratios, something that was more of a necessity than an option. The total debt to total asset ratio for fiscal year 2018 was 0.335, a long way off its 2013 figure but much better than 2014. This also applies to the total debt to total equity ratio that is now at 0.504. These debt ratios have been on the right track, however if they start to get worse in the coming years it could be a large cause for concern and could cause long-term investors to stay away.
Income Statement
Revenue – has grown strong over the last 6 years at a rate of 14.63% per annum. This would suggest that there has been a steady increase in demand over this period. Year ended 2018 saw NVIDIA’s revenue jump 40.58% from the year previous, likely down to an increase in demand for GPU’s for cryptocurrency mining. This is not likely to be sustained and the cryptocurrency mining industry has already declined significantly from its peak. If revenue continued to grow at the same pace for the last 6 years it would still represent a health company. Investments and expansion into the AI industry will also open larger revenue streams.
Cost of Sales – is shown as 40.07% of revenue ($3,892,000,000) however I have added research and development costs into this to arrive at cost of sales being 58.56% of revenue ($5,689,000,000). I believe that research and development should be added as this cost is used to technically create the product, without it would mean there is no product to produce. After adjusting for the new figure gross profit margins decline from 59.93% to 41.44%, an incredibly strong figure that shows NVIDIA has the competitive advantage needed to beat competitors. Remarkably, the adjusted cost of sales margin has decreased from around 75% to 59% in the last 6 years. This is likely due to increased efficiency in manufacturing and more competitive products being developed allowing NVIDIA to charge more than their competitors.
Research and Development – Sits at 18.50% of revenue and over the last 6 years has been around 25-30%. This decline as a percentage of revenue is likely to be the large jump in revenue. R&D spending can increase again to move back in line with previous figures or revenue to decline. I am expecting somewhere in the middle due to NVIDIA’s products having a strong demand through various customer demographics. For comparison, Intel’s R&D spending over the same period has been around 20-21%. NVIDIA has been investing slightly more and revenues have been growing at a much faster pace, possibly down to this.
Sales, General and Administrative – costs have been steady as a percentage of total revenue between 8-10%. The fact that this has been steady shows that NVIDIA is able to keep a lid on operations even with competitors being a factor. Even during the financial crisis and NVIDIA’s revenue taking a 16% fall their SG&A costs were maintained around the 10% level.
Interest Income and Expenditure – what is interesting about NVIDIA is its ability to have interest income greater than interest expense. Not only do they have a low portion of debt to revenues and assets, they are generating returns on their cash.
Net Income – growth has been exceptional for the last 6 years growing at 30% year on year. This growth has been from several factors such as the rise of gaming and the need for high performance chips. Cryptocurrency has been a contributing factor so the large growth too. With the cryptocurrency market fading other revenue streams will need to be explored if 30% a year is to be maintained at a minimum for the foreseeable future. Thankfully the rise of artificial intelligence will help to generate revenue for NVIDIA. With this market being in its infancy, there is huge growth potential and NVIDIA is in an advantageous position with its higher quality chips compared to competitors. Tesla, one of NVIDIA’s customers that used their chips in the autonomous driving vehicles of Tesla has decided to make its own chips. Although this is not an ideal situation, it forces NVIDIA to be more competitive with its products, otherwise it will lose poll position. NVIDIA has several manufacturers that already use its chips, so it is less of a concern. As the AI industry starts to encompass all parts of life, NVIDIA will benefit hugely. Net Income as a percentage of total revenue has seen a steady increase over the period from around 13% to 32% for year ended Jan 2018. This represents how strong NVIDIA is in being able to charge a healthy premium for its products, expertise and ability to keep expenses and poor decisions to a minimum.
Earnings Per Share – came in at $4.82 per share (diluted). At current prices at $147 per share that represents a return of 3.27%. I have not adjusted the number of shares (diluted) as NVIDIA has not been issuing or buying back many shares over the last 6 years (average is 605,000), if they were significantly buying shares back I would have adjusted this number due to the EPS figure showing “phantom” profits.
If I were to purchase NVIDIA I would be looking at around the $85 area and lower. This would be based on its current growth in earnings, assets, equity and debt. This price would also accommodate a slow down in growth of the economy i.e. less revenue being generated by NVIDIA.
Note
UPDATE RE: Class Action LawsuitThere has been an announcement by a law firm that it has filed a class action lawsuit against NVIDIA with regards to the Cryptocurrency market. In summary it is seeking compensation for NVIDIA being unable to fully identify the risk associated with the cryptocurrency market and that it said it would not be affected by any drop off in the market from miners.
My Thoughts: It is an attempt to make some money for the claimants and law firm. Risks occur throughout the market and sometimes events happen that are hard to both see and deal with. I believe that this is one of those instances. Investors should be aware of the risks that they take and that investing into shares of a company can also represent a gain or loss in their capital. Often firms will believe that they understand a market and will advise of that, it does not mean that they will have a contingency for every situation and nor should they. The people investing into NVIDIA are or should have been fully aware that shares will increase and decrease in price, and that events and bubbles occur.
What does this mean for NVIDIA: I am very confident that it will have little effect on NVIDIA and its share price. If for some reason it does, it is good for investors as we will get closer to the $85 price mentioned, a price at which I would like to start buying shares.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.