Is This Company a Dividend Play?

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

NVIDIA Corporation (NASDAQ: NVDA) just reported a solid third quarter and beat analyst estimates with record revenue of $1.2 billion and a net profit of $209.1 million, up over 17 percent from $178.3 million in the same period last year.  However, while profit easily beat the analysts' mark, the company provided lighter-than-expected revenue guidance for the coming quarter in the range of $1.03 billion to $1.18 billion.

Then why, despite light revenue guidance, were shares of NVDA trading up around 2% in the after-hours session Thursday?

Record margins

While it certainly helps to post record revenue numbers, shareholders were delighted to see NVIDIA is making more per dollar than ever before with record GAAP gross margins of 52.9% on strong shipments of their high-margin line of Kepler GPUs, including a "greater mix into [their] high-end segments." 

Tegra, GeForce strength

While NVIDIA's professional Quadro business remains constrained, its weakness was more than offset by enviable strength in its Tegra-based products, which showed revenue increases of 35.7% from last quarter and 27.6% year-over-year.  This should come as no surprise given NVIDIA's slew of Tegra design wins in phones and tablets, including Google's Nexus 7 and Microsoft's (NASDAQ: MSFT) Surface tablet.

Also remember a few months ago NVIDIA won a spot for inclusion of its GeForce products in the new line of Apple (NASDAQ: AAPL) Macbook Pro laptops.  Of course, while it's true NVIDIA is betting much of its future on growth in Tegra products and is doing much to distance itself from its former over-dependence on discrete GPUs, inclusion in the Macbook Pro line should do much to give NVIDIAan edge in the continuous battle it faces with competitor AMD (NYSE: AMD).  Even if the Macbook Pro win doesn't haven't a substantial positive effect on revenues, any perception of confidence in NVIDIA's products is a good thing -- especially when it comes from Apple.

To the cloud

Perhaps the most under-appreciated trend for NVIDIA is its new Kepler-based GeForce GRID technology which aims to bring next-generation games to the cloud -- and streamable through any device with an Internet connection and a screen -- with minimal lag times through its partners' implementations of massive networks of data center servers.  

Translation? Game consoles, handheld systems, and PCs with discrete graphics cards will no longer be required to experience the newest games the way they're meant to be played.  Furthermore, since the GRID is continually-upgraded with the latest GPU technology, consumers would no longer have to worry about continous upgrades or the stagnant graphics technology limitations of game consoles.  

NVIDIA CEO Jen-Hsun Huang also mentioned during the 2012 GPU Technology Conference that NVIDIA's GRID technology arose out of a lust for the movie and television industries' broad reach and compatibility.  Nowadays, consumers think nothing of the revolutionary work Netflix (NASDAQ: NFLX) has done to make streaming video more convenient and commonplace than ever.  

As Gaikai CEO David Perry asked during his conversation with Huang at the conference, "Could you imagine making a movie and it only working on one specific brand of television?  It's a crazy idea, but it's something we put up with (in the gaming world)."  As NVIDIA's Kepler-based GeForce GRID grows, Huang points out NVIDIA will be able to seamlessly "put the power of the GPU in the hands of billions of mobile users around the world." 

Buybacks and dividends?

I admit I'm generally skeptical about stock buyback programs being a responsible use of cash (cough * Zynga * cough).  However, considering NVIDIA's massive $3.43 billion cash pile, growth prospects, and comparatively-conservative P/E around 16, I'm fine with its willingness to reduce the outstanding float to increase shareholders' slice of the pie.  Besides, I'm hardly the first person to claim NVDA shares are undervalued.

Perhaps the biggest news of the afternoon came, though, when the company announced its inaugural quarterly dividend of 7.5 cents per share, representing a 2.4% annual rate at today's prices.  While some might wonder whether this signals an inability to find better uses for their cash pile, remember this annual dividend of 30 cents per share represents a healthy payout ratio of approximately 27% assuming margins and revenue remain within NVIDIA's stated guidance. As a shareholder of nearly three years and counting, I'm more than happy to get paid for my troubles while I wait for the company's stock price to catch up with its value.

Say what you will, but I'm proud of NVIDIA for putting the building blocks in place to stay relevent in the fast-changing world of computing.  As is the case with most good things, NVIDIA's significant new market opportunities will take time to materialize.

As famed value investor Joel Greenblatt says, "To the patient investors go the spoils."


Steve Symington owns shares of NVIDIA. The Motley Fool owns shares of Apple, Google, Microsoft, Netflix, and NVIDIA. Motley Fool newsletter services recommend Apple, Google, Microsoft, Netflix, 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.If you have questions about this post or the Fool’s blog network, click here for information.

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