Could Nvidia Make Others Envy Your Wealth?
The cause of investor joy was a big jump in market share for Nvidia's standalone graphics processor (GPU) -- a chip that helps display images faster on notebook computers. According to semiconductor researcher, Mercury Research, Nvidia’s GPU share in notebook computers rose 8.9 percentage points in the second quarter. As a result, Nvidia ended June 2011 with the number one market position -- 50.6% of the units shipped -- ahead of Advanced Micro Devices (NASDAQ: AMD) that had 49.4% of GPU shipments.
Is this surprisingly good news enough to prompt an investment in Nvidia? Here are two reasons to consider it:
- Good earnings reports. Nvidia has been able to surpass analysts’ expectations in four of its last five earnings reports. For its first quarter ending in April 2011, Nvidia's earnings were $135.2 million, or 22 cents a share --slightly lower than its previous year profit of $137.6 million, or 23 cents a share. However, Nvidia's adjusted EPS of $0.27 beat by 37% expectations of $0.19. Nvidia predicted a revenue rise in the second quarter between 4% and 6% -- implying revenues of between $1 billion and $1.02 billion and well ahead of analysts' average forecast of $992.5 million according to Thomson Reuters I/B/E/S.
- Low valuation. Nvidia's price to earnings to growth of 0.57 (where a PEG of 1.0 is considered fairly priced) means it is at a pretty cheap price. It currently has a P/E of 34.7 and is expected to grow 61% to $1.05 in fiscal 2011.
- Under-earned its capital cost. Nvidia is earning less than its cost of capital – but it’s improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2010, Nvidia’s EVA momentum was 8%, based on 2009 revenue of $3.2 billion, and EVA that improved from negative $407 million in 2009 to negative $152 million in 2010, using an 11% weighted average cost of capital.
- Slow growth and shrinking profit -- but strong balance sheet. Nvidia's $3.5 billion in revenues have climbed at an average rate of 3.1% over the last five years and its net income of $253 million has gone down at a 13.3% annual rate over the period -- representing a 7% net margin. It has very little debt ($23 million) while its cash has increased at a 22.8% annual rate from $1.1 billion (2006) to $2.5 billion (2010).