Nvidia: Tegra Sales And Share Repurchases Could Drive Shares Higher

Apr.11.14 | About: Nvidia Corporation (NVDA)

Summary

NVIDIA is fairly valued, but share repurchases could drive the share price higher.

Tegra sales should at worst be flat during fiscal 2015.

The technicals are bullish.

NVIDIA Corporation (NASDAQ:NVDA) pioneered visual computing, the art and science of computer graphics. With its invention of the GPU, the field expanded to encompass video games, movie production, product design, medical diagnosis, and scientific research.

NVDA's main source of revenues is its GPU line, which faces competition from AMD and Intel (NASDAQ:INTC). Generally, NVDA serves the high end of the graphics card market, but is facing increased competition from CPU and GPU integrated circuits. As the performance of circuits that contain both a CPU and a GPU increases, NVDA could lose its competitive advantage. To counter this threat, NVDA has moved into supercomputers with its Tesla line and mobile with its Tegra line. I think the combination of product offerings will lead to a 5% increase in annual revenues during fiscal 2015, as Tegra sales remain, at worst, flat.

With that stated, I think NVDA is fairly valued at $19.26 per share, but there is upside potential on the share repurchase program.

Recent Developments

  1. NVDA's GPUs are powering the upcoming releases and new GPU-accelerated features of Adobe Creative Cloud video applications.
  2. The NVIDIA Jetson TK1 Developer Kit provides developers with the tools to create systems and applications that can enable robots to seamlessly navigate, physicians to perform mobile ultrasound scans, drones to avoid moving objects, and cars to detect pedestrians.
  3. NVIDIA and VMware announced that NVIDIA GRID technology is available on the VMware Horizon DaaS Platform to deliver 3D graphic on virtualized desktops and applications delivered through the cloud.
  4. NVDA plans to integrate a high-speed interconnect into future GPUs, enabling GPUs and CPUs to share data five to 12 times faster than they can today.

Analyst's Note

NVIDIA Corporation is engaged in creating the graphics chips used in personal computers that bring games and home movies to life. It has two reporting segments: the GPU business and the Tegra Processor business.

NVDA appears to be facing favorable industry dynamics. But I think the PC gaming industry faces stiff competition from Microsoft's (NASDAQ:MSFT) Xbox and Sony's (NYSE:SNE) PlayStation. Additionally, sales growth may have to come from market expansion and market share maintenance, as NVDA is already the dominant player in the market. Lastly, the mobile market is becoming increasingly competitive, and NVDA's ability to win share in mobile via its Tegra platform is far from guaranteed.

For the year ending (in millions of dollars, except per share data):

2012-01

2013-01

2014-01

2015-01E

2016-01E

Revenue

3,998

4,280

4,130

4,337

4,423

Gross profit

2,057

2,226

2,268

2,298

2,344

Operating income

648

648

496

650

663

Net income

581

562

440

564

575

Diluted EPS

0.94

0.90

0.74

1.00

1.05

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Consolidated revenue was adversely impacted by Tegra sales in fiscal 2014. I think the impact from the Tegra segment will be muted in fiscal 2015, with upside potential. The GPU segment should continue to post solid growth. Consolidated revenue is forecasted to increase 5% in 2015 and 2% in 2016. Diluted EPS is forecasted to increase faster than revenue on the positive impact of share repurchases.

2012-01

2013-01

2014-01

2015-01E

2016-01E

Asset turnover

0.72

0.67

0.57

0.65

0.70

Ending financial leverage

1.34

1.33

1.63

2

2.3

Debt-to-capital

0

0

0.30

0.41

0.49

Current ratio

2.78

3.01

2.01

1.8

1.6

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The balance sheet is anticipated to be significantly impacted by share repurchases. Asset turnover is forecasted to improve. I think the total equity balance declines, which increases the equity multiplier and debt-to-capital. I'm not forecasting an increase in the absolute level of debt. Liquidity is forecasted to decline. The solvency position is expected to be solid.

For the year ending (in millions of dollars):

2012-01

2013-01

2014-01

2015-01E

2016-01E

Cash flow from operations

909

824

835

911

929

Capex

139

183

255

275

300

FCFF

770

641

580

636

629

FCFE

770

641

2,058

636

629

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Generally, cash flow is expected to remain flat, which reflected the underlying fundamentals of the business. But at the same time, NVDA is expected to generate over $600 million of free cash flow to the firm. The expectation is that management continues to return that capital to shareholders in the form of share repurchases and dividends, which are forecasted to increase at 10% annually through 2016.

Granted, I am not the biggest fan of the gaming industry from an investment perspective, but I am a fan of companies who generate a return on capital above their cost of capital. Consequently, I am a fan of NVDA, who is forecasted to generate a return on equity of 14% in 2015 and 19% in 2016.

General Risks

  1. The share price is likely to remain volatile, and investors could lose a portion or all of their investment.
  2. Investors should judge the suitability of an investment in NVDA in light of their own unique circumstances.
  3. A decline in the global economic growth rate and/or a decline in the pace of economic growth in the United States could adversely impact the results of operations and the share price.
  4. The technology industry is characterized by rapid technological change, which could materially adversely impact the results of operations.
  5. Competition in product development and pricing could adversely impact performance.
  6. Incorrect forecasts of customer demand could adversely impact the results of operations.
  7. Higher interest rates may reduce demand for NVDA's offerings and negatively impact the results of operations and the share price.

This section does not discuss all risks related to an investment in NVDA.

Portfolio & Valuation

Click to enlarge

NVDA is in a bull market of primary degree and a bear market of intermediate degree. For now, the interpretation is that this is a consolidation prior to a move higher. The $20-25 per share zone is the anticipated price target.

Monthly expected return

Quarterly expected return

Quarterly standard deviation of returns

1.4%

4.09%

23.58%

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Intrinsic value estimates

Forward price multiples based on base case intrinsic value

Optimistic

$26.75

P/E: 19.31

Base case

$19.26

P/S: 2.51

Pessimistic

$10.70

P/BV: 3.26

P/CFO: 11.95

Click to enlarge

Based on the fundamentals-based intrinsic value estimate, NVDA is fairly valued. But the price multiples are above their 5-year averages. So, based on the price multiples, NVDA is overvalued. I tend to rely more on the fundamentals-based models; thus, NVDA is fairly valued. But there is scope for upside, as management continues to repurchase outstanding shares.

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.