03 December 2008

NVDA: Financial Analysis through October 2008 (Updated)

We previously posted an analysis of NVIDIA's earnings announcement for the three months that ended on 26 October 2008, which was the third quarter of the company's fiscal 2009.  Our evaluation was incomplete  because the press release did not include a Cash Flow Statement and because the Balance Sheet omitted certain details.  To compute gauge scores, we had to estimate values for the missing data items.

Since NVIDIA has now filed a 10-Q with the SEC, we are able to update the analysis to incorporate the data that hadn't previously been disclosed.

NVIDIA Corporation (NASDAQ: NVDA), based in Santa Clara, CA, builds a variety of specialized Graphics Processing Units.  These devices perform computationally intense tasks required to produce realistic images for video games and other applications.

The company competes with Intel Corporation (NASDAQ: INTC), Advanced Micro Devices (NYSE: AMD), and other firms.  Apple, Inc., (NASDAQ: AAPL) recently decided to increase its use of NVIDIA's chips, at Intel's expense.  Steve Jobs is reported to have said this "change speeds up processing-intensive activities—playing popular 3-D video games, for example—as much as six-fold."

NVIDIA attributed reduced GPU sales in the July quarter to weak demand for desktop computers and to a "miscalculation of competitive price position."  The company's problems were compounded by faults in certain products for notebook computers, which led to a $196 million charge to cover warranty, replacement, and related costs.  The faults are said to result from "a weak die/packaging material set" that is no longer used.

It's not clear that this amount will be sufficient when lawsuits are considered.  However, insurance might defray part of the bill.

Not surprisingly, NVIDIA's missteps led to major decline in the price of the company's shares.

The additional data in the 10-Q led to some minor changes in our gauges.  The complete set of scores is shown below:

The 10-Q didn't change our evaluation of the latest quarter's Income Statement.  The evaluation will not be repeated here, but it is available in the earlier posting.

Cash Management October
3 months
12 months
Current Ratio 2.5 2.5 3.2
LTD/Equity 0% 0% 0%
Debt/CFO N/A N/A N/A
Inventory/CGS 64.0 days 53.0 days 60.0 days
Finished Goods/Inventory 63.3% 52.9% 47.3%
Days of Sales Outstanding (DSO) 51.1 days 49.7 days 48.0 days
Working Capital/Market Capitalization  29.8% 26.4% 8.8%
Cash Conversion Cycle Time (CCCT)
56.0 days 49.1 days 37.3 days
Gauge Score (0 to 25) 11 17 15
NVIDIA's Balance Sheet remains strong. The company has $1.3 billion in Cash and Short-term Investments and no Debt.  However, the greater amount of Inventory and the larger "Finished Goods" proportion of Inventory level could be a concern.  NVIDIA explains that newer GPU and Media and Communications Processor (MCP) products makes up most of the increased inventory.

Growth October
3 months
12 months
Revenue growth 9.9% 25.5% 33.7%
Revenue/Assets 116% 125% 126%
CFO growth -57.9% -21.6% 112%
Net Income growth -46.8% -4.6% 84%
Gauge Score (0 to 25) 1 2 14
Growth rates are trailing four quarters compared to four previous quarters.

As indicated by the weak score, all of the Growth metrics have deteriorated significantly.

Profitability October
3 months
12 months
Operating Expenses/Revenue 86.2% 82.7% 81.1%
ROIC 28.5% 49.6% 104%
FCF/Equity 3.4% 19.6% 48.8%
Accrual Ratio 11.3% 10.3% 4.7%
Gauge Score (0 to 25) 3 9 15

Expenses are up and investment returns are down, although the ROIC figure is still reasonable. Falling Cash Flow from Operations weakens the FCF/Equity ratio and the Accrual Ratio.

Value 28 November 2008 31 October 2008 31 July 2008 31 October 2007 5-year
Share Price$7.47$8.76$11.44$35.68N/A
P/E 11.3 13.2 11.6 30.8 27.6
P/E to S&P 500 average P/E 80% 94% 64% 178% 166%
Price/Revenue 1.0 1.2 1.5 5.7 2.7
Enterprise Value/Cash Flow (EV/CFO) 5.6 7.0 5.3 16.1 18.5
Gauge Score (0 to 25) 25 24 25 2 N/A

The contrarian Value gauge, which is the largest contributor to Overall score, tends to move in the opposite direction of the share price.

Per GCFR standard practice, the Value gauge score is computed with the share price at, or near, the end of the subject quarter.  The important score above was, therefore, the one computed with 31 October share price.  The newer information is provided to give a sense about how November's trading activity would affect the score.

NVIDIA's valuation ratios can be compared with other companies in the Specialized Semiconductor industry.

Overall October 2008 3 months
12 months
Gauge Score (0 to 100) 52 65 39

Former high-flier NVIDIA has stumbled badly, and its investors have been punished severely. NVIDIA shares are selling at a significant discount to their historic norms.  Our backward-looking gauge scores are, alas, blind to some of the challenges NVIDIA will have to overcome: replacing faulty devices, defending itself from lawsuits, and the ensuring that the company's products remain top-notch despite short product cycles and formidable competitors.

No comments:

Post a Comment