NVIDIA CORP. $10 (Nasdaq symbol NVDA; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 546.2 million; Market cap: $5.5 billion; Price-to-sales ratio: 2.0; WSSF Rating: Average) designs 3D-capable chips for computers, video-game consoles and other devices. The company outsources most of its production to chipmakers in Asia.
The recession has hurt new-computer sales. In turn, computer makers are ordering fewer graphics chips from Nvidia.
Computer makers are also switching to cheaper chips, particularly those that work well with “netbook” computers. Netbooks are small, inexpensive laptop computers whose processors are less powerful than those of traditional laptops. Because of their lower prices and portability, they are currently selling faster than desktops and laptops.
As a result of these factors, Nvidia’s sales fell 42.4%, to $664.2 million in its first fiscal quarter, which ended April 26, 2009. It posted sales of $1.2 billion a year earlier.
The company lost $201.3 million, or $0.37 a share. However, that was mostly because of a $140.2-million charge related to its plan to buy back worthless stock options from its employees. (Nvidia’s share price is down from its all-time peak of $39.67 in October 2007, and this has hurt the value of these options. Buying them back should help Nvidia hang on to valuable employees, such as engineers and programmers.) In the year-earlier quarter, Nvidia earned $176.8 million, or $0.30 a share.
Nvidia spent $301.8 million, or 45.4% of revenue, on research in the latest quarter. That’s up 37.9% from $218.8 million, or 19% of revenue, a year earlier. This helps it maintain its leading 70% share of the desktop-computer graphic-chip market over rival ATI, a division of Advanced Micro Devices.
This spending also helped Nvidia develop several new products in recent months. For example ample, its Ion platform combines high-definition graphics chips with Intel processors. This will improve the performance of portable computers without drawing more battery power. As well, the company’s new Tegra chips should bring high-definition video to cellphones. Both of these products should spur Nvidia’s sales as the economy rebounds.
Nvidia can easily afford to maintain its high research spending. The company holds cash of $1.3 billion, or $2.45 a share. Its $25.4-million long-term debt is less than 1% of its market cap.
The company will probably lose $0.40 a share this year. But its 2010 earnings should rise to $0.28 a share. The stock trades at 35.7 times that estimate. That seems high, but it is still reasonable in light of Nvidia’s market leadership and the growing use of graphic chips in portable electronic devices.
Nvidia is a buy.
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