Nvidia Is Fairly Valued As Investors Weigh PC Concerns Versus Early Success With GRID

May.14.14 | About: NVIDIA Corporation (NVDA)


Investors worry about PC reliance and competition in gaming.

Nvidia has a rock-solid balance sheet, is still growing and is moving into new growth areas like GRID.

I believe shares are roughly fairly valued.

Investors Nvidia (NASDAQ:NVDA) have seen solid returns so far this year, as investors are happy with strong improvements in earnings, as they weigh the concerns about PC dependence versus early success in its new growth initiatives.

First Quarter Headlines

Nvidia reported revenues of $1.10 billion for the first quarter of its fiscal 2015. Revenues rose nicely by 16% year-on-year, but fell by 4% on a sequential basis after a traditionally strong fourth quarter.

Nvidia made great efforts by limiting operating expense growth to 4% on an annual basis. As a result, GAAP earnings rose by 75% to $136.5 million, although earnings fell from $146.9 million in the fourth quarter.

Earnings per share rose by 85% on the back of sizable share repurchases made over the past year, coming in at $0.24 per share.

Looking Into The Second Quarter

Revenues for the second quarter are seen between roughly $1.08 billion and $1.12 billion, with GAAP margins seen around 53.7%. Operating expenses are foreseen at $457 million, with capital expenditures estimated at just $40 million. This should bode well for free cash flows in the coming quarter.

Based on this guidance, operating earnings are seen at roughly $134 million, which is down from reported operating earnings of $151.4 million in the first quarter of this year. As such, I believe GAAP earnings might come in around $125 million.

Investor Day

At its investor day, Nvidia stressed that it is the leader in visual computing technology which is used for gaming, design and virtualization. Besides these ¨traditional¨ industries, its solutions are also used in cars and so-called smart devices. All of these industries are long-term growth industries and Nvidia's expertise and strong patent position should allow the business to benefit from these trends.

The company's GPU and Tegra business lines both leverage a single-unified architecture for applications on PCs, the cloud as well as mobile.

Between the fiscal 2010 and 2014, Nvidia reported a 9% compounded annual growth rate for the PC GPU platform, with revenues of around $3.3 billion. The other platforms are smaller, but grow faster. The mobile Tegra annual growth rate came in at 48% for the time period, with revenues of around $375 million, as cloud GPU growth rates of 64% pushed revenues to some $190 million.

Sizable opportunity

The opportunities for the company remain large with Android gaming expected to increase from about $4.5 billion in 2013 to $12 billion by 2016. Nvidia has been well-recognized as a leader in the field, having roughly 550 fundamental graphics patents, roughly 3 times the number of patents held by number two, Intel (NASDAQ:INTC) and number three AMD (NYSE:AMD), which is a big competitor in games.

Nvidia acknowledges that mobile and PC are the dominant platforms on which games are being played, far more popular than Microsoft's (NASDAQ:MSFT) Xbox and Sony's Playstation 4.

Besides gaming, Nvidia targets the car market, enterprise virtualization GRID as well as machine learning. These businesses are still emerging, yet show promising growth, as their contribution to the overall results are still very much limited.


Nvidia ended the first quarter with $4.35 billion in cash, equivalents and marketable securities. As total debt, including capital obligations, totaled $1.38 billion, the company operates with a net cash position of close to $3 billion.

At $18.25 per share, Nvidia's equity is valued at roughly $10.2 billion, thereby valuing operating assets at $7.2 billion. Based on trailing annual revenues of $4.1 billion and earnings of $440 million, operating assets are valued at 1.75 times annual revenues and 16 times annual earnings.

Nvidia has been using its strong cash holdings to repurchase shares at a fairly aggressive rate while a quarterly dividend of $0.085 per share provides investors with a 1.9% dividend yield.

Takeaway For Investors

Investors so far are confident about the continued progress which Nvidia is making under command of Jen-Hsuan Huang. The company still relies heavily on PCs, notably in gaming, which is perceived as a risk by the market. At the same time, emerging businesses like its solutions for cars and GRID for the enterprise virtualization business have yet to scale up.

So far, investors are happy with the still-growing operations and the early success, notably with 600 customers currently evaluating the virtual GPU server platform, called GRID. Leading names like IBM (NYSE:IBM), Dell and Hewlett-Packard (NYSE:HPQ) are selling these GPUs which are already embraced by VMware (NYSE:VMW), creating a potentially huge source of growth.

As such, I remain in doubt. Nvidia has a rock-solid balance sheet, and the valuation excluding cash balances is not that demanding, while the company is still showing healthy year-on-year growth, even as the company guides for flat sequential revenue growth.

The huge dependency on PCs remains an issue even as Nvidia's revenues are not in decline yet. That being said, despite enthusiasm regarding the GRID products in particular, these new activities are too small to drive growth and the valuation if PCs' revenues might face a serious slump in the short term.

Not having great confidence and visibility concerning the pace of either of these trends, I remain cautious and stay on the sidelines.

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.