Investing Series – NVIDIA Corporation

Friends, here’s my first post as a part of Value Investing series & opportunities. Hope you all like it and I shall start the same with my views on one of my favorite businesses to own for a Value Investor – NVIDIA Corporation.

Disclaimer: I’m not any registered stock market broker/trader/analyst. All views are personal and I shall essentially talk about the Company, its vitals, what underscores the selection of Company for me. I will also touch a little about Valuation.

NVIDIA Corporation (ticker symbol: NVDA):

Why NVIDIA?

The reason for me to invest in this Company? Well, when I was growing up in 90s, there were very few Global Technology Companies in India we knew of which included the names like AMD, Intel, Microsoft, IBM, Linux, HP and NVIDIA. Today, we are in 2020 and these names have become bolder, stronger and popular. After having started my investing journey in Indian businesses in 2010, it was time for me to move to these global giants who have been my favorites both as a kid and as a grown up. It’s time for us to not just look at the twinkling stars but also dare to fetch them. I know one may say, this is too naive to select a business as a value investor or may be not having a deep knowledge of that Industry, this approach could easily lead one to invest in once darlings like Nokia etc. but, hey, do you really think so? Is it easy for a shaky/weak Company to survive few defining decades of turmoil specially the era between late 90s to early 2020s (2020, what a year has been so far!!!). Think again and you would get the answer.

Well, after having known this Company for so long, I decided to see if the vitals are good enough for me to invest or pump my money here. I shall share with you my selection criteria and what fascinates me the most. So buckle up and here we go:

  1. Return on Equity (ROE): Nvidia has been consistently generating a high ROE and for the trailing 12 months, this ratio has been 29% and let’s have a look at this ratio for last 5 years:
Source: https://www.macrotrends.net/stocks/charts/NVDA/nvidia/roe

Look at the average and the consistency on ROE.

2. Long Term Debt to Equity of less than 1: NVIDIA debt/equity for the three months ending April 30, 2020 was 0.57. Nvidia’s overall long term Debt to Equity ratio for the last 10 years has been a max. of 0.83 and a median of 0.22

3. Revenue growth: Well, Company has been consistently generating a very high top line for last 5 years of over 15%. Well, the Annual Report (2020) do mention the rising challenge as below:

As we entered the year, our outstanding growth was stopped in its tracks by the simultaneous headwinds of a collapsing cryptocurrency market, a pause in hyperscale spending, and a rapidly deteriorating trade environment with China. Despite being knocked back on our heels at the outset, we finished the year strong. Full-year revenue was $10.9 billion, down 7 percent. Gross margins expanded to 62 percent and GAAP earnings per share were $4.52, down 32 percent. We returned $390 million during the year to shareholders through quarterly cash dividends. The growth trajectory of the fourth quarter tells the story—with revenue of $3.11 billion, up 41 percent from a year ago.

Source: Annual Report 2020

4. Growth Margins: Historically, Company has been generating decent Gross Margins of over 50% for last 5 years:

Source: https://www.macrotrends.net/stocks/charts/NVDA/nvidia/gross-margin

And to look at the margins for recent fiscal years,

Source: Annual Report 2020

Company also reports a decent net profit margins historically with recent figure being of over 28%.

5. Current Ratio: Here’s a look at the current assets & liabilities of the Company:

6. Sales growth Qtr. over Qtr. for the company has been over 10%.

7. Operating Cash Flows: For me, the most important numbers to see the performance of the Company are the operating cash flows. As we call it in India, how much money finally comes in my pocket the end of the day. Let’s have a look at the Operating cash flows for NVIDIA over last 5 years which have grown with a CAGR of 39%:

8. Free Cash flows: For last 5 years, let us have a look at the Free Cash flows:

The FCF have grown by CAGR of over 39% over last 5 years.

Valuation: I attempt to look at the following important metric that defines valuation for me but before that let’s look at the movement in Stock price:

The stock has rallied quite a lot in recent past. Let’s look at Price to Free Cash flow (for last 5 years):

Current PFCF Ratio is 27.58 while the average for last 5 years for the Company has been 16.21 and median has been 15.39. We see that the PFCF did touch 30 in 2017, but it has again started hovering at the same levels now. A clear case of Company being over-valued at the moment.

Disclaimer: invested. Please ensure you do your research/analysis before making any decision.

Hope you all like the post, this being the first one, please do comment/provide feedback for improvements, factual inconsistencies. Take care all you people!!!

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