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Last Updated: Jul 4, 2008
Business Summary
NVIDIA is a leading supplier of computer graphics processors. The company targets the high end of the market, where primary applications are computer gaming, video manipulation, and graphics editing.
Growth Strategy
NVIDIA benefits from a market with good organic growth potential. Video gaming has expanded as children who grew up gamers have remained gamers into adulthood. Computer video editing has expanded in both directions - creating entire animated movies and realistic special effects at the high end, and simple home video editing at the low end. This has led to a demand for high performance graphics even in bargain PCs. Additionally, modern operating systems have been developed to take advantage of the capabilities of these graphics. Mobile devices and supercomputing also are growing industries in need of GPU chips. NVIDIA aims to stay at the top of this market by remaining an innovation leader through R&D.
Competitive Position
Computer graphics is a very competitive business. 3 large players dominate the scene. NVIDIA and AMD (formerly ATI) form a near-duopoly in the high end processor segment, with the two companies historically leap frogging each other in successive generations. Intel embeds graphics processors with it's CPUs, catering to the low end of the market. Intel and NVIDIA will soon be competitors, however, as NVIDIA has already begun making low end embedded GPU's, and Intel has announced plans to enter the high end. NVIDIA's current competitive advantages in design are tenuous, short-lived, and non-durable.
Risks
The two primary risks are competition and the cyclical nature of semiconductors. NVIDIA and ATI have traded the technology lead several times in the past, sometimes in the span of just months. Intel looms as a major threat, with massive financial and intellectual resources to compete successfully in the high-end graphics market. Incorrectly timing the chip cycle can also result in a lot of pain over the short term.
Management
Management is experienced and well vested. The CEO is the founder, Jen-Hsun Huang, who owns a 6% stake in the company. He has successfully led Nvidia through competitive pressures, a technology crash, and numerous GPU process generations. The company is highly dilutive with stock options and grants.
Financial Health
NVIDIA has great financial health, with nearly 1.9 billion in cash vs. no debt. Over the past 12 months the company has produced over a billion dollars in free cash flow (29% of revenues), and 180% return on tangible capital. With improved products from AMD and potential competition vs. Intel, it's unlikely these lofty figures can remain intact. NVIDIA's 5-year average ROTC is 78%, free cash flow margin is a more indicative 8%.
MagicDiligence Opinion
NVIDIA is a fine technology company, financially very strong, well managed, and a history of leadership in the graphics processing industry. However, it's position as a Magic Formula stock is due to factors we don't feel are sustainable, particularly the stellar return on tangible capital figure. Add to this the fact that the stock is not remarkably cheap - at just a 5.21% earnings yield (most MFI stocks are 9% or higher). An R&D misstep for a product cycle would inevitably lead to a revenue, earnings, and stock price plunge. That said, the company is solid enough to survive a misstep or two, and there are much less attractive MFI stocks in the screen. NVIDIA is a upper level "tweener", but not a Top Buy.
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The information on this website is for informational purposes only. No warranty is provided or implied as to the accuracy, completeness, or timeliness of this information. This information may not be construed as investment advice of any kind. The proprietor of this website is not responsible in any way for losses or damages resulting from the use of this information.
© 2008 Alexander Online Properties
Nvidia Corporation
NVDA
Semiconductors - Graphics Processors
Competitors
Advanced Micro Devices (AMD)
Intel (INTC)
Current Price/Change
$5.90 -0.33 (-5.30%)
Market Capitalization is calculated like:
Market Cap = Share Price * Number of Shares
Market capitalization is the price you would have to pay to acquire the entire company on the open market (at current prices). MagicDiligence categorizes companies into 3 size classes:
Large Cap: Over 10 billion market cap.
Mid Cap: Between 2 and 10 billion market cap.
Small Cap: Under 2 billion market cap.
Market Cap (Millions)3,617 (Mid Cap)
The formula for Earnings Yield is:
Earnings Yield = EBIT / Enterprise Value
Earnings Yield tells you how much the company has produced in income relative to the price you paid for it. This can be compared to the yield on a traditional fixed income investment such as a bond, CD, or money market account. Very high earnings yields indicate a cheaply priced stock, relative to trailing earnings. Earnings Yield is one of the two statistics used by the Magic Formula screening strategy.
Earnings Yield40.39%
Free Cash Yield is calculated like:
Free Cash Yield = Free Cash Flow / Enterprise Value
Free Cash Yield is a more telling version of Earnings Yield. While a company can easily manipulate earnings, the cash it collects and spends is very discrete. Since the value of a business is directly related to the cash it produces for owners, Free Cash Yield is a better valuation statistic than Earnings Yield. The concept is the same, however.
Free Cash Yield63.26%
EV/S stands for Enterprise Value over Sales. This is calculated like:
EV/S = Enterprise Value / Total Revenues
Several studies have confirmed that stocks with low EV/S ratios, particularly under 1.0, have historically been excellent investments. Although the Magic Formula strategy is based on Earnings Yield, combining successful strategies is one way to improve results, and that is why EV/S is listed here.
EV/S0.47
Return on Tangible Capital is calculated like:
ROTC = EBIT / Tangible Invested Capital
where:
Tangible Invested Capital = Total Assets - Goodwill - Intangibles - Excess Cash - Non-Debt Current Liabilities
Return on Tangible Capital is the 2nd statistic used by the Magic Formula screen. Its purpose is to identify companies that efficiently invest money to generate the highest returns. Exceptional firms can consistently generate 30% or higher returns on capital. MagicDiligence lists both one-year and five-year averages for this statistic to help weed out companies that can consistently generate high returns from those that benefit temporarily from a fad product or high commodity prices.
Return on Tangible Capital180.5% (ttm)
78.1% (5yr avg)
Free Cash Flow Margin calculation:
FCF Margin = Free Cash Flow / Revenues
The percentage of sales that is available as free cash flow. Free cash flow can be reinvested back into the business, paid out to shareholders, used to pay off debt, or saved for a rainy day. Higher values indicate more profitable firms. MagicDiligence likes to see 5% or higher.
Free Cash Flow Margin29.2% (ttm)
8.2% (5yr avg)
Excess cash is calculated like:
Excess Cash = Cash - (Current Liabilities - Current Assets + Cash)
Excess Cash refers to cash on the balance sheet that is not required to cover current liabilities, should the need arise. In theory, if the company had to be liquidated, this is the cash that would be left over for shareholders. It is useful in approximating what cash is invested in the business and what is extra.
Excess Cash1853M
Debt is simply the total amount of debt, short-term and long-term, listed by the company in the most recent quarterly or annual report.
Debt-
Coverage Ratio is calculated like:
Coverage Ratio = EBIT / Net Interest Expense
If Net Interest Expense is 0 or higher, Coverage Ratio is listed as 0. This statistic is a financial health measure telling you how many times the company can cover debt interest obligations with operating earnings. Generally a value of 7.0 or higher is comfortable, but a Coverage Ratio of 0 is ideal.
Coverage Ratio-
Debt to Equity ratio is:
Debt to Equity = Total Debt / Total Equity
This is another financial health statistic. A company finances it's business through two means: bank debt and shareholder equity. If a company is liquidated, bank debt is usually paid off before shareholders see anything. A high debt-to-equity ratio (over 0.80) can be a sign of too much debt, although this varies by business. An ideal value is 0.
Debt to Equity Ratio-
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Jul 23, 2008
May 8, 2008
Mar 19, 2008