About Nvidia
Honestly, if Taylor Swift was a stock, she’d be this one.
Allow us to explain.
It took sort of a while for her to get onto the music scene, but once her presence was established, there was absolutely no turning back.
The parallel can be drawn in that it seemed like hardly anyone cared much (if at all) about Nvidia during the 90s, however, once its capabilities and applications became more and more sought after and its ability to turn the technology world on its head became as clear as day, people took notice and the value of the company skyrocketed.
Sure, Taylor Swift might’ve just been some aspiring music artist hailing from West Reading, Pennsylvania and Nvidia was once just a quirky computing start-up that held pretty much zero clout in the technology-sphere, but they surely got their due.
Boy did they.
Taylor Swift is writing, recording and touring and making more money than I will likely ever see in my entire life and Nvidia has grown out of its garage start-up phase and is (as of this writing) a trillion-dollar company that is unequivocally leading the artificial intelligence (AI) movement, specifically as it relates to computational processing.
While you might’ve hoped that the rest of this article was about Taylor Swift, unfortunately, we don’t identify as Swifties and we figured it would be worth reserving more space for the company of the hour, Santa Clara, California-headquartered technology gargantuan, Nvidia.
First and foremost, the company’s share price is up just about 135% since early last August, which can largely be attributed to its stellar quarterly financial results as well as the overall global infatuation with artificial intelligence, pushing the stock up leaps and bounds to levels that not many would have ever imagined.
As it pertains to the company’s actual business, Nvidia is a technology company that operates both in the software and hardware spaces, specifically as it is a major supplier of graphics processing units, otherwise commonly referred to as GPUs, which is essentially the backbone of the technology we see today.
No, actually.
One of the main purposes of GPUs is to efficiently and accurately process and subsequently display images on technology platforms (think phones, personal computers etc…), therefore, it isn’t all that challenging to consider the fact that Nvidia plays a mission critical role in the technology that the developed world uses and relies upon daily.
While Nvidia’s technological applications are broad in nature, the company focuses much of its operations within a few industries such as gaming, data analytics, mobile computing, automotive, high-performance computing and a few others that, again, have rather deep, practical applications and all of which can be characterized as rapidly growing markets, which is undoubtedly both an intermediate and long-term tailwind for a company such as this one.
Is this company recession resistant or even recession proof?
Well, many of its products and operations as a whole are tied to the chip market (i.e., semiconductors) and when things are good, things tend to be very good but when the tide turns and a few posture a more bearish stance on the global chip market, people tend to think that the sky is falling and stocks such as Nvidia’s (NASDAQ: NVDA), Texas Instruments, Taiwan Semiconductor Manufacturing Company (TSMC) and others usually get clobbered.
So no, I don’t view Nvidia as being completely recession proof, however, as the company continues building in-house and expanding its capabilities and technologies, we think it is fair to say that it is setting itself up quite well to shield itself from greater overall recessionary pressures and fears as demand for its products continue to rise and its products and capabilities become more and more integrated into people’s lives.
Nvidia is seemingly leading the AI renaissance, however, its stock isn’t going to keep going up forever and we frankly are sensing dot-com bubble-esque vibes in this time period, however, if the numbers behind this company are good or even great, that is primarily what we care about as objective, long-term investors.
Welcome to the stock analysis club, Nvidia.
Nvidia’s stock financials
In kicking things off, like we mentioned earlier, Nvidia is a trillion-dollar company.
As of this writing, the company is worth a whopping $1.13 trillion, to be exact.
In addition to its astronomical valuation, Nvidia also maintains a share price of $468.46, a price-to-earnings (P/E) ratio of 237.34 and it also, to our surprise, issues an annual dividend to its shareholders of $0.16.
Given this preliminary information, we can make a few observations, one of which includes that this company’s stock (NASDAQ: NVDA) seems a bit on the expensive side right now (particularly referencing its present price-to-earnings ratio), however, this is one of those instances in which this company is more than likely growing its top-line (revenues) at a brisk pace and therefore it is potentially worth paying a premium for, as we have briefly discussed in previous stock analysis articles, especially as it relates to fast-growing technology companies.
Additionally, this company dishes out a small dividend which is just a small perk of being an owner in this company through its stock.
In getting more familiar with the nitty gritty of this company, as it relates to the company’s balance sheet, Nvidia’s executive team is tasked with managing and properly deploying approximately $41.2 billion in terms of total assets along with around $19 billion in terms of total liabilities, which, to us, is a confidence invoking balance sheet structure, especially given that this company is likely growing at a rapid rate, as it has evidently been able to tame its total liabilities well below that of the level its total assets, indicating that it is prepared to weather just about (non-extraordinary, of course) any storm that may comes its way anytime soon.
For a technology firm such as this one, this is a very lean, promising balance sheet.
Moving right along to the company’s income statement, Nvidia’s total annual revenues since 2019 have been generally growing, however, there has been some fluctuation over the years, likely as a result of COVID-19 and pronounced boom and bust demand periods for GPUs and other computing and semiconductor-related products.
More specifically, the company’s total annual revenue stood at $11.7 billion in 2019, tracking down a little to $10.9 billion the following year, then rising back up to around $16.7 billion in 2021, making yet another leap towards the upside to its two latest reported revenue figures (displayed on TD Ameritrade’s platform) of $26 billion.
COVID-19 and perhaps supply chain-related fluctuations aside, Nvidia’s revenues have been trending in the right direction and given the inherent demand and hype around its products, we don’t see many scenarios in which it sees annual revenues anywhere between $10 billion and $20 billion ever again.
According to the company’s cash flow statement, you can bet your bottom dollar that Nvidia is cash flow generative as all get out.
For example, the company’s net income and total cash from operations figures have been resoundingly positive in recent history (specifically referencing since 2017) which implies that this company does a decent job at producing cash flows and that it might just have a healthy trailing twelve month (TTM) net profit margin as well.
Nvidia’s stock fundamentals
There is good news and there isn’t really bad news, per se, but just some news that isn’t as good as we had initially anticipated.
Specifically, according to the figures listed on TD Ameritrade’s platform, Nvidia’s TTM net profit margin is 18.52% while the industry’s listed average is a bit higher, standing at 19.29%, which is good in the sense that the company’s profit margin is nearly identical to that of the industry, showing just how competitive this company is with respect to the competition on this critical metric, however, the not as good news is the fact that it still trails (even though not by a wide margin at all) the competition’s average.
We don’t think this is any major problem with Nvidia or its business model or operations, but simply a byproduct of the chip sector being a very, very, brutally competitive one, however, as time goes on there will likely be a fair amount of consolidation within the industry mixed with a fair share of smaller, weaker companies going under as the larger companies become increasingly powerful.
With the clout and growth this company is experiencing and probably maintaining in the years to come, we have little to no doubt that it will be able to elevate its TTM net profit margin in due time.
As it pertains to the company’s TTM returns on assets and investments, also according to the figures displayed on TD Ameritrade’s platform, Nvidia’s are yet again nearly identical to those of the industry’s averages, speaking once again to the immensely competitive nature of the sector, with, for example, its TTM return on assets perched at 10.69% while the industry’s respective average stands just an ounce taller at 12.34%.
This just isn’t a discrepancy that is large enough to worry us, as we think this company has the financial firepower and collective brainpower to outperform its peers (on average) in these respects in both the intermediate and long run.
Should you buy Nvidia stock?
If this is the chip and artificial intelligence revolution, Nvidia is the unequivocal leader of the movement.
No questions, please, this is just how it is right now, as we view OpenAI (an AI research lab) as a close second and companies such as Microsoft and Alphabet are sprinting for the first place spot, which they may or may not ultimately attain.
However, with its market share and overall global footprint and everything it has done already, it is rather difficult to term this company anything other than what it is; a beast.
Sure, while the chip sector has proved itself to be somewhat volatile, as this is a marked supply and demand industry that isn’t always as balanced as one might hope, the company itself has a lot of growth levers to pull moving forward in order to perhaps hedge itself from some of the greater overall industry fluctuations, positive or negative.
On a slightly less speculative note, this company has a balance sheet that is in stellar condition (especially when factoring its recent growth rates), its revenues are in a stable-to-growing state, its ability to generate positive cash flow is clear as can be and it has remained notably competitive with the competition (on average, that is) with respect to its displayed TTM returns on assets and investments.
The sticking point lies within the company’s current valuation.
The market seemingly thinks that Nvidia is a trillion-dollar company and we think it will be at some point, however, given all of the newfound hype and recent anticipation circling artificial intelligence, while this company is littered with intrinsic, very real quality products and capabilities, it is overvalued and until the AI bubble does some popping, we don’t think it makes all that much sense to buy the top and be potentially be forced to sell the bottom with this one.
Unfortunately, for the present valuation alone, we feel it is fair to give this company’s stock a “sell” rating until its share price comes back to earth.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.