Nvidia Corporation (NASDAQ:NVDA) is expanding into end-markets such as the super, mobile and cloud computing markets. Last quarter, mobile revenue increased by 42% from the same quarter last year, and data center and cloud revenue increased by 29%. As the world's leader in GPU, NVDA will benefit from the rising demand for personal computers, which is, according to Intel, driven mostly by a strong demand for business PCs. Nvidia has decent valuation metrics and solid earnings growth prospects. The company is generating strong cash flows, and it returns value to its shareholders by stock buybacks and by dividend payments. In this article, I will explain why, in my opinion, NVDA's stock is a promising long-term investment.
Nvidia Corporation operates as a visual computing company. Nvidia, which invented the graphics processing unit [GPU] in 1999, makes products for "visual computing," high-performance computing, and mobile computing markets. The company was founded in 1993, and is headquartered in Santa Clara, California.
The table below presents the valuation metrics of NVDA; the data were taken from Yahoo Finance and finviz.com.
NVDA's valuation metrics are pretty decent; the company has low debt, and the Enterprise Value/EBITDA ratio is low at 9.50. According to Yahoo Finance, NVDA's next financial year forward P/E is at 17.83, and the average annual earnings growth estimates for the next 5 years is at 7.11%; these give a high PEG ratio of 2.51.
Latest Quarter Results
On May 08, Nvidia reported its first-quarter fiscal 2015 financial results, which beat EPS expectations by $0.07 (41.20%) and beat Street's estimates on revenues. The company reported revenue for the first quarter of fiscal 2015, ended April 27, 2014, of $1.103 billion, up 16 percent from a year earlier and down 4 percent from $1.144 billion in the previous quarter. GAAP earnings per diluted share were $0.24, up 85 percent from $0.13 a year earlier and down 4 percent from $0.25 in the previous quarter. Non-GAAP earnings per diluted share were $0.29, up 61 percent from $0.18 a year earlier and down 9 percent from $0.32 in the previous quarter.
In the report, said Jen-Hsun Huang, president and chief executive officer of Nvidia said:
First quarter results benefited from gains in PC gaming and our continued progress in the data center and cloud. Nearly 600 enterprises worldwide are now evaluating GRID, our virtual GPU server platform. VMware announced support for GRID to enable GPU-accelerated enterprise virtualization. And with IBM, Dell and HP now selling our GPUs in their high-volume servers, we expect large-scale data centers to be a significant source of growth.
Dividend and Share Repurchase
Nvidia started paying dividend on November 2012; the forward annual dividend yield is at 1.85%, and the payout ratio is only 37%.
Since NVDA is generating strong cash flow and the payout ratio is very low, I believe that the company is well-positioned to achieve steady dividend growth going forward.
On April 11, Nvidia announced that it will return $1 billion this fiscal year to shareholders in the form of stock buybacks and dividend payments, including $100 million in stock being repurchased this quarter. This will bring to $1.2 billion the total capital returned to shareholders since the company announced its quarterly dividend program in November 2012.
A comparison of key fundamental data between NVDA and its main competitors is shown in the table below.
NVDA has the highest PEG ratio among the stocks in the group. However, its Enterprise Value/EBITDA ratio of 9.50 is the second-best in the group, only Intel Corporation (NASDAQ:INTC) has a lower ratio of 7.17.
According to Portfolio123's "All-Stars: Zweig" powerful ranking system, NVDA's stock is ranked second among all S&P 500 tech stocks that pay a dividend with more than 1.8% yield, and only KLA-Tencor Corporation (NASDAQ:KLAC) has a better ranking (see my SA article about KLAC). The "All-Stars: Zweig" ranking system is based on investing principles of the well-known investor Martin Zweig. The ranking system is quite complex, and it is taking into account many factors like; EPS Growth, Sales Growth, Market Performance and Insider activity. Back-testing over fifteen years has proved that this ranking system is very useful.
The charts below give some technical analysis information.
The NVDA stock price is 3.82% below its 20-day simple moving average, 1.81% below its 50-day simple moving average and 9.05% above its 200-day simple moving average. That indicates a short-term and a mid-term downtrend, and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at -0.0619 and descending, which is a bearish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 55.17, which does not indicate oversold or overbought conditions.
Many analysts are covering the company, but their opinion is extremely divided. Among the 32 analysts, 3 rate it as a strong buy, 6 rate it as a buy, 19 analysts rate it as a hold and 4 rate it as an underperform.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering NVDA stock, there are 19 analysts who have the four or five-star rating, eight of them recommend the stock, ten analysts have a hold rating on the stock and one analyst rates it as a sell.
On May 19, RBC Capital's analyst Doug Freedman raised his rating on the shares to Outperform from Sector Perform, and raised his price target to $26 from $21, counting it among cash-rich, beaten-down chip names. I consider Mr. Freedman's analysis very valuable, since he has 5-Star rating from TipRanks for the accuracy of his previous calls.
NVDA's stock has significantly outperformed the market in the last years. Since the beginning of the year, NVDA's stock has gained 14.6%, while the S&P 500 index has increased 5.9% and the Nasdaq Composite Index has risen 4.8%. Moreover, since the start of 2013, NVDA's stock has risen 49.8%, while the S&P 500 index has increased 37.2% and the Nasdaq Composite Index has risen 45.0%. Nevertheless, considering its decent valuation metrics, its solid earnings growth prospects and its leader position in the industry, NVDA's stock is not expensive.
On June 12, Intel raised its outlook for revenue and gross profit margin this quarter and the full year; Intel reported the rising demand for personal computers is driven mostly by strong demand for business PCs. Since according to Nvidia, it has over 60% of the PC discrete graphics market and more than 80% of workstation graphics, it will benefit from the rise in the demand for PCs. Moreover, IBM Corp. (NYSE:IBM), Dell and HP (NYSE:HPQ) are now selling Nvidia's GPUs in their high-volume servers; Nvidia expects large-scale data centers to be a significant source of growth.
Nvidia is focusing in penetrating the mobile device market with its Tegra wireless chip offerings, with several new versions coming to market in the coming quarters. Although the Tegra processor represented only 17.9% of 2013 revenues, its sales have grown by 42% from Q1'14 to Q1'15.
The chart below shows revenue in $million.
Source: 2014 Annual Meeting of Stockholders
As the world's leader in graphics processing units, NVDA will benefit from the rising demand for personal computers. Nvidia has decent valuation metrics and solid earnings growth prospects. Furthermore, the company is ranked second among all S&P 500 tech stocks yielding more than 1.8%, according to the "All-Stars: Zweig" powerful ranking system. NVDA is generating strong cash flows, and it returns value to its shareholders by stock buyback and by dividend payments. All these factors bring me to the conclusion that NVDA stock is a smart long-term investment.
Disclosure: The author is long INTC, AMD, KLAC, QCOM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.