Is Nvidia Cheap Yet?

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nvidia (NASDAQ: NVDA), along with most of the tech sector, has taken a tumble in the last few years. This is partly a reflection of continuing weakness in the desktop computer market. After clocking highs near $40, the stock was run down to about $12.36 at the time of writing. Still, recent earnings reports from the company have been good, partly due to the incorporation of their chips in various tablets, one of the few tech products that have seen strong sales growth. Has Nvidia’s valuation become attractive yet?

At a Glance

Nvidia produces high-end graphics chips for use in PCs, laptops, tablets and smartphones. Employing just over 7000 people, the firm has a market cap of about $7.72 billion. The stock has a beta of 1.59, making it a bit more volatile than the overall market. The firm’s three core divisions are Graphics Processing Units, Professional Solutions Business, and Consumer Products Business. Of these segments, the last is not yet profitable, but losses are narrowing. GPU’s are the company’s traditional bread and butter, and this segment continues to perform quite well, snapping up some market share from competitor AMD.

Earnings and Cash Position

Recent earnings reports have been encouraging, with the latest presenting record revenues and gross margin. Revenue was up nearly 13% and the gross margin improved to 52.9% on a GAAP basis. For Q2 and Q3 2013, EPS beat by about 34% and 11.5% respectively. The operating margin in the company’s best-known GPU division expanded around 4% to 26.12%. The company is also unusually rich in cash. It has virtually no debt with a total debt to equity ratio of 0.42, and $3.43 billion lying around in cash. This is around half the company’s market cap, an impressive feat. Some analysts speculate that the company’s strong results, combined with its enviable cash position, make it an interesting takeover target.

Valuations and Metrics

The stock’s P/E is historically low at the moment, sitting around 15.43x earnings. The price to book is also very reasonable at 1.64. The TTM operating margin is at 14.72%, and on the rise. Return on equity is also decent at 11.61%. Based on these valuations, Nvidia currently appears cheaper than competitor Qualcomm (NASDAQ: QCOM) with a P/E of 18.23x and a price to book of 3.25. However, Qualcomm’s operating margin is twice as high, and YoY quarterly revenue is about 5% higher as well. Intel (NASDAQ: INTC), another chipmaker, looks extremely cheap at the moment with a P/E of only 8.76x, but with negative YoY quarterly earnings and revenue growth, the company may be more of a value trap than a value play.

Bottom Line

It appears that the market is currently undervaluing Nvidia. The company has consistently been delivering good quarterly results, and has an excellent cash position with virtually no debt on its books. Moreover, it seems well positioned for growth in the future, supplying parts to a thriving industry with impressive sales growth. However, the market has punished the stock despite these points, which leave it priced attractively at the moment.


DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Qualcomm. Motley Fool newsletter services recommend Intel and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus