Last week, Nvidia (NASDAQ:NVDA) released its result for the second quarter of its fiscal year. Though the semiconductor company has started shipping its virtualized graphics, the consistent growth in its line of business did not generate sufficient returns. Consequently, EPS decreased 14.8% year-on-year. The company's net income also went down 21.8% compared to the same period year ago.
A closer look at the company
While gross margin went up 4.00% year-on-year, a variety of factors, including the slow sales of Tegra 4, caused revenues to fall 6.4% year-on-year. Since Tegra 4 is an important product of Nvidia, the company is dependent on conditions there. Operational expenses also went up 17.0% to $460 million, but they are expected to be approximately $418 million for the remaining part of the year. The stock currently trades at 16 times trailing earnings. However, Wall Street analysts feel that Nvidia's troubles with Tegra 4 may not be resolved next year. Their forecast imply a forward P/E of 18.
Looking at insider activity, purchases in the last one year has been nil, but two insider sales have taken place. Insiders however hold 28 million shares of the company. Investors who mimic the actions of insiders have the possibility of making some profit.
Institutional investment is a sign of good health in a company. In Nvidia's case, institutions and mutual fund owners own 78% of Nvidia's shares. The list includes Vanguard Group, Black Rock Institutional Trust Company, Fidelity Growth Company Fund, and others.
Comparing Nvidia with peers
Nvidia's semiconductors peers include Intel (NASDAQ:INTC), Qualcomm (NASDAQ:QCOM), and [[AMD]]. Intel at a trailing P/E of 12.16 is cheaper than Nvidia. However, it has a heaver debt load at a debt equity of 25.23, compared with 0.42 for Nvidia. At 9.68%, Intel has a lower return on assets than Nvidia (9.73%). Though Intel has a higher profit margin at 18.13, it is valued more expensive at a price to sales of 2.14, compared with 1.97 for Nvidia. Intel's cash per share at 3.90 is valued lower then 5.02 for Nvidia. And at an EPS growth rate of 11.00% for the next five years, it will grow slower than Nvidia (12.00%)
AMD has been having problems. In its most recent quarter, revenues slipped 18% year-on-year, compared with a 6.4% revenue slide for Nvidia. AMD's gross margin also narrowed to 39.5% from 45.2% a year ago. At a return on assets of -7.41%, a cash per share of 1.34, a debt equity of 570.20, and an EPS growth rate of 11.50% in the next five years, AMD appears less profitable than Nvidia.
Qualcomm has seen its revenues improve 35% year-on-year in its latest report. Its earnings per share also went up 30%. With the stock valued at 13 times forward earnings, it should be closely monitored. With a profit margin of 28.48, a return on asset of 9.93, a cash per share of 6.68, and an EPS growth rate of 16.67% estimated for the next five years, it is clear Qualcomm has more profitable price multiples than Nvidia, which is middle-of-the-road among its peers.
From a macroeconomic standpoint, Nvidia has benefited from the projected quarter-on-quarter growth of 4.6% globally for the semiconductor sector. However, more growth is expected. In their latest research study, "Global Semiconductor Market Outlook to 2017", RNCOS' analysts estimate that the market is slated to grow at a CAGR of 7.6% between 2013 and 2017. The growth in revenues will be driven by the increased demand for smartphones and tablets. Nvidia is poised to gain more benefits and further improve its price multiple.
Overall sentiments from analysts are mixed. Due to recent revenue declines of Nvidia, Needham downgraded the company from a buy rating to hold. Oppenheimer also downgraded the stock from outperform to perform. However, some have seen merit in Nvidia's sales, current ratio, and long term debts in relation to assets.
When Nvidia's P/E is compared with 24.65 for the sector, it is not doing badly. Also, the sector's profit margin of 9.7% is lower than Nvidia's. Due to this and other reasons, it does seem like a good idea to watch the company. It is possible that it can recover from its current troubles over Tegra 4 and improve its price multiples in the near future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.