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:
- Cash Management: 12 of 25 (up from 11 in October)
- Growth: 0 of 25 (down from 1)
- Profitability: 4 of 25 (up from 3)
- Value: 13 of 25 (down from 25)
- Overall: 35 of 100 (down from 53)
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 Management | January 2009 | 3 months ago | 12 months ago |
| Current Ratio | 2.8 | 2.5 | 3.0 |
| LTD/Equity | 1.1% | 0% | 0% |
| Debt/CFO | 0.1 | 0 | 0 |
| Inventory/CGS | 79.6 days | 64.0 days | 58.4 days |
| Finished Goods/Inventory | 70.1% | 63.3% | 61.2% |
| Days of Sales Outstanding (DSO) | 52.5 days | 51.1 days | 52.8 days |
| Working Capital/Market Capitalization | 32.3% | 29.8% | 12.8% |
| Cash Conversion Cycle Time (CCCT) | 74.0 days | 56.0 days | 48.7 days |
| Gauge Score (0 to 25) | 12 | 11 | 10 |
| Growth | January 2009 | 3 months ago | 12 months ago |
| Revenue growth | -16.4% | 9.9% | 33.5% |
| Revenue/Assets | 96.5% | 116% | 128% |
| CFO growth | -80.4% | -57.9% | 122% |
| Net Income growth | N/A% | -46.8% | 78.0% |
| Gauge Score (0 to 25) | 0 | 1 | 13 |
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.
| Profitability | January 2009 | 3 months ago | 12 months ago |
| Operating Expenses/Revenue | 95.6% | 86.2% | 79.6% |
| ROIC | N/A | 28.5% | 91.6% |
| FCF/Equity | -6.3% | 3.4% | 46.8% |
| Accrual Ratio | -2.1% | 12.6% | 7.7% |
| Gauge Score (0 to 25) | 4 | 3 | 19 |
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.
| Value | January 2009 | 3 months ago | 12 months ago | 5-year median |
| P/E | N/A | 13.2 | 18.8 | 27.4 |
| P/E to S&P 500 average P/E | N/A | 88% | 112% | 166% |
| Price/Revenue | 1.2 | 1.2 | 3.7 | 2.7 |
| Enterprise Value/Cash Flow (EV/CFO) | 12.2 | 7.0 | 10.4 | 16.8 |
| Gauge Score (0 to 25) | 13 | 25 | 12 | N/A |
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.
| Overall | January 2009 | 3 months ago | 12 months ago |
| Gauge Score (0 to 100) | 35 | 53 | 56 |
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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