14 March 2009

NVDA: Financial Analysis through January 2009 (Update)

We previously posted an analysis of NVIDIA's financial performance -- a significant loss -- during the three months that ended on 25 January 2009.  This period was the fourth quarter of the company's fiscal 2009.  The evaluation was limited because the press release did not include a Cash Flow Statement and the Balance Sheet omitted some details.  With relevant information not yet available, we had to make certain estimates about NVIDIA's finances to compute gauge scores.

NVIDIA (NASDAQ: NVDA) subsequently filed a 10-K for fiscal 2009 with the SEC.   We extracted previously undisclosed data from the 10-K and updated our analysis accordingly. 

This post reports on the update.

NVIDIA Corporation, 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.  NVIDIA, which had its initial public offering in 1999, sells to computer manufacturers such as Apple, Inc., (NASDAQ: AAPL). 

Early in 2008, before the worst effects of bursting real estate bubble were felt, NVIDIA purchased 25 acres of land and ten commercial buildings in Santa Clara for $195 million.

In the second quarter of fiscal 2009, NVIDIA recorded a $196 million charge to cover warranty, etc., costs resulting from faulty processors NVIDIA sold for use in notebook computers.  The problems were attributed to "a weak die/packaging material set."  (NVIDIA allocated the charge to Cost of Revenue, but we treat it as a special operating expense.)

It may be of greater long-term significance that the lines between NVIDIA's GPUs and general purpose microprocessors, such as those made by Intel Corporation (NASDAQ: INTC) and Advanced Micro Devices (NYSE: AMD), are blurring.  Intel and NVIDIA appear to be squaring off for bloodier battles ahead.  Intel sued NVIDIA in February 2009 over the future applicability of an earlier license that "allowed nVidia to provide chipsets for Intel-based motherboards."  In addition, reports have circulated that NVIDIA might augment its product line with general purpose "x86" microprocessors made by Intel and AMD.

The additional data in the 10-K softened the fall in the gauge scores, relative to our initial projections.  The Cash Flow data wasn't as bad as we had estimated.  The complete and current set of scores is shown below:
The 10-K didn't change our evaluation of the latest quarter's Income Statement.  It will be sufficient to say here that Revenue was 46.4 percent less than in the immediately preceding October 2008 quarter, and it was 60 percent less than in the year-earlier January 2008 quarter.  The Net Loss for the quarter was $148 million (-$0.27/share).

Cash ManagementJanuary 2009
3 months ago
12 months ago
Current Ratio2.8
79.6 days64.0 days58.4 days
Finished Goods/Inventory
Days of Sales Outstanding (DSO)52.5 days
51.1 days
52.8 days
Working Capital/Market Capitalization  32.3%
Cash Conversion Cycle Time (CCCT)
74.0 days
56.0 days
48.7 days
Gauge Score (0 to 25)
NVIDIA has considerable liquidity.  The awful fourth quarter barely made a dent in the company's Cash and Short-Term Investments, which now total $1.26 billion.  Debt remains minimal.  The dramatic Inventory increase, especially the Finished Good component, demonstrates how much Sales were below the company's expectations.  The ratio of Working Capital to Market Capitalization is rather high, and it might eventually attract the attention of value investors.
GrowthJanuary 20093 months ago
12 months ago
Revenue growth-16.4%
Revenue/Assets 96.5%
CFO growth
Net Income growth N/A%
Gauge Score (0 to 25)0
Growth rates are trailing four quarters compared to four previous quarters.

As indicated by the zero score, contraction is a more accurate word than growth to describe the state of NVIDIA's business at the end of the year.

ProfitabilityJanuary 20093 months ago
12 months ago
Operating Expenses/Revenue 95.6%
ROIC N/A28.5%91.6%
Accrual Ratio
Gauge Score (0 to 25)4

Expenses are up and investment returns are down.  The once-impressive ROIC figure has been erased. However, the lower Accrual Ratio points to there being Cash Flow from Operations to back up reported earnings.

ValueJanuary 20093 months ago
12 months ago
5-year median
P/E to S&P 500 average P/E N/A
Price/Revenue 1.2
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)13

NVIDIA's share price continued to fall in the November-January period, from $8.76 on 31 October 2008 to $7.95 on 31 January 2009. (We use the price on the month-end date nearest to quarter-end date to calculate the Value metrics.)  The share price was over $30 between August 2007 and December 2007 -- not that long ago!

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

OverallJanuary 20093 months ago
12 months ago
Gauge Score (0 to 100)35

Former high-flier NVIDIA has stumbled badly, and its investors have been punished severely.   A 46 percent drop in Revenue from one quarter to the next is shocking and far worse than expectations when the quarter began.  Sales of NVIDIA's chips practically came to a halt in the fourth quarter, as a result of economic, industry, and (perhaps) competitive factors.  

Even if the marketplace loosens up, NVIDIA will still have to overcome challenges related to the sale of defective products and the need to ensure its products remain top-notch despite short product cycles and formidable competitors.

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