Has Nvidia Run Out of Ways To Use Its Cash?

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

If you were to ask someone high up in any company if they were out of good ideas you would probably get a list of innovations recently made or in the works. However, when a company does a stock buyback I always wonder if the innovation train has stopped. Nvidia (NASDAQ: NVDA) extended its buyback program into 2014. It could be that there are no improvements to be made in the graphics processor business, but it is hard to believe the cash cannot be of better use. Nvidia does tend to keep pretty focused and has avoided jumping into parallel areas not in its traditional sphere.

There is no reason for it to go bumbling about trying to grow like it's a new company. I would prefer a slightly larger dividend and retaining the cash for future opportunities. Right now the Tegra processor is being used in many different places that you would not think Nvidia would be. Tablets are not a stretch, but they are being deployed in Tesla's cars.

Despite all my reservations about stock buybacks, it might just be a result of the company's success. Market share was grabbed from Intel (NASDAQ: INTC) and Advanced Micro Devices (NYSE: AMD), so business is doing well. Tegra is still one of the key products showing growth, so pushing through something new might just be a distraction. Increasing the dividend binds the company to that level. The psychological effect of cutting a dividend later would do serious damage. I understand the basic logic behind a buyback, and I know the market seems to love them with notable exceptions. However, I cannot think of a stock that saw the price rise and sustain that increase due to a buyback. So it is good to know that Nvidia is improving business while doing the buyback, because simply stagnating is not a solution to weak stock performance.

Nvidia, Intel, and AMD all suffer from similar risks. There is so much talk about the end of PCs and sometimes notebooks, but I think that is misleading. Nvidia's earnings call mentioned how the graphics sector did well due to all the popular games that were released. So desktop PCs might be a niche, but it is a profitable niche. Management also mentioned that a high-end tablet is better than a low-end notebook, or something to that effect. I think we are seeing the obsolescence of anything in the midrange. If all you need is email and a web browser, with some media capability, most of the tablets will be fine. If you need a word processor or spreadsheet application then you might need some peripherals, but you do not need expensive hardware.

Desktop PCs used for gaming can be a lucrative niche industry, but does not have the volume that is necessary to keep the prominence these companies have. However, the money spent must be pretty substantial, and there are regular updates as better computers are needed to play games. Considering the success of games like Skyrim and Assassin's Creed there are people out there upgrading their computers. At least some of the PC gaming segment is still alive. For example, StarCraft is a PC game. This also helps Nvidia with its fantastic GeForce chips. That makes me like Nvidia for having a strong position in traditional PCs and notebooks in addition to phones and tablets.

I think lack of penetration into mobile is the core of Intel's problem. I just upgraded my desktop with an Intel chip, but I do not feel Intel's impact further than that. Even if the chip is used in laptops that is not a sector that sets hearts aflutter. It is also contracting since some of the demand has gone to tablets. Despite all this Intel might still be undervalued by some measures, but I would still avoid it. It is still the big dog on the block and its dominance means that it is a strong company. However, cracks are beginning to show on its facade, and when these cracks move to the foundation it is time to worry.

Turning to the seemingly perennial laggard, AMD has been on a nice run the last few days. I find the news to be a bit bitter sweet. I do not think having a large investor in a position of basically having to save the company really changes much. However, if the fear of a bankruptcy is gone perhaps the fear driving the price down has subsided. Is that a reason to become a bull? I wanted AMD to really nail earnings last quarter. The lull of the previous quarter would have been the switch to Trinity and the company would be on the road to recovery. Since that did not occur, I would wait to see what the company does. It is selling a location in Texas, but it really depends on what the company does with its liquidity stopgap that will determine if it can gain a firm footing.

Nvidia should not be forgotten just because the company is doing well. Cash and assets should be put to the most productive uses, and if they are not then whatever success you have might end up being history. So Nvidia is a good company to invest in, but I would take a tentative position. The earnings call did not give me a picture of what the company is going to do next. A share repurchase program is not the sort of business development I am interested in.

TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. 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