As of 20 Apr 2023, NVIDIA Corporation's stock is trading at $279.31 and year-to-date (YTD), it is up by 95%. On an annual basis, the stock is up by 30% whilst the S&P 500 is down by 7%, which means the company' stock has outperformed the broader market by approximately 37% over this period.
Is NVIDIA Corporation (NASDAQ: NVDA) worth a look as a 'buy and hold' investment? Let’s analyze whether the stock has potential or if it’s one to avoid.
Why Fundamental Analysis Matters
On balance, the price of a company's stock is usually tied to its fundamentals over the long term. It, therefore, makes sense to start by looking at NVDA's fundamentals when we are considering if it has the makings of a 'buy and hold' investment.
By 'fundamentals', we mean a set of key metrics which include price-to-earnings ratio (P/E ratio), price-to-book value (P/BV), price-to-sales ratio (P/S ratio), earnings per share (EPS) and debt. When looked at together, fundamentals can tell us whether or not a company is likely to be a good investment, and for as long as investors have been buying stocks, they have relied on fundamental analysis to assess the financial health of an organization as well as its growth prospects.
What do NVIDIA Corporation’s fundamentals tell us about the investment opportunity? Let's have a look.
Read: Growth Opportunities in Advanced Semiconductor Tech
NVIDIA Corporation's Key Metrics
First, let's look at NVIDIA Corporation's EPS, which is one of the most commonly used ways to assess how profitable a company is on a 'per share' basis. EPS is calculated by dividing the company’s profits by the number of outstanding company shares. It is measured over a specific period of time, usually annually or quarterly.
NVIDIA Corporation's EPS is 1.7, according to its most recent financial statements, and year-on-year, it fell by 55%. Frankly, this is somewhat underwhelming.
Another key metric to look at is the P/E ratio because it immediately tells a potential investor how cheap or expensive the stock is. The ratio tells us how much investors are willing to pay for a company’s earnings, and it is calculated by taking the price of a stock and dividing it by the EPS. A higher ratio suggests that the stock is expensive in relation to its earnings, and a lower ratio indicates it might offer more value.
Based on its most recent financials, NVDA has a P/E ratio of 160.3. This is 460% higher than the average P/E ratio across its industry (which is 28.6), and this suggests that the stock may offer less value compared to companies in the same sector at present.
Next, let's look at one of the most common valuation metrics - the P/S ratio. It is calculated as the current price divided by sales for the previous 12 months, and helps us get a sense of how much investors are willing to pay for a company's revenues on a 'per dollar' basis.
NVIDIA Corporation's P/S ratio is currently 26. With a P/S ratio of 26, the company is slightly overpriced compared to similar companies within the same sector. The sector-wide average is 5.8, which is 350% higher than NVIDIA Corporation's.
We also like to look at a company's price-to book-value (P/BV), which tells us how much investors are willing to pay for a company's assets. It is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book'). P/BV is used by value investors to identify potential investments and a P/BV of 1 is usually considered a solid investment.
Based on figures from its last reported balance sheet, NVIDIA Corporation's P/BV is 31.2, which is 510% higher than the average across the industry, which is 5.1.
Finally, when analyzing an investment opportunity, you should always take a look at how much debt a company has on its books, as this can help you assess how risky it is as an investment. Carrying a large amount of debt can be a red flag if the company is not generating enough free cash flow to service the debt.
According to its most recent financial statements, NVIDIA Corporation has total debt of $12.03bn, and this has gone up by 3% over the past year. Adjusting for $13.3bn in cash & short-term investments, the company has a 'net debt' of $-1265m.
Based on these figures, NVIDIA Corporation's current levels of net debt don't worry us, as the company generates enough revenue to service its debt, and is not using debt to fund their operations, which is good to see.
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Is NVDA a Buy?
Bank of America (BofA) analysts predict that Nvidia's stock price may reach heights unseen in over a year, due to the increasing demand for its hardware driven by the boom in artificial intelligence. This comes as Nvidia shares have already experienced significant growth this year, partly due to the ChatGPT craze.
According to Vivek Arya, a senior analyst at BofA Securities, surging AI workloads in cloud and enterprise data centers may cause a shift in computing power and value towards specialized accelerators, such as Nvidia's Graphics Processing Units and custom chips from Broadcom and Marvell. This shift would be away from traditional x86-based Intel and AMD server CPUs.
BofA also suggests that in 2023, sales of specialized accelerators could potentially surpass those of worldwide standard x86 processors. These accelerators enhance AI and machine-learning applications, further contributing to the growing demand for Nvidia's products.
Nevertheless, industry data gives pause for thought. The World Semiconductor Trade Statistics Organization reported a 4% drop in total chip sales in February compared to the previous month. With the first-quarter earnings season approaching, the outlook for semiconductor profits continues to deteriorate, with earnings for chip-related firms in the S&P 500 projected to drop about 25% in 2023. This combination of rising stock prices and falling profits may present challenges for chipmakers during the reporting season.
With this in mind, we think that NVIDIA Corporation is one for the watchlist.
As with any stock, however, there are additional factors to consider before making an investment decision. This analysis it general in nature and based on historical data, and it does not take into account your specific investing objectives or financial circumstances. Additionally, this article does not look at the macro environment where geopolitical headwinds, internal company changes and individual technicalities in the way a company conducts its business can have a significant impact on a company's long term outlook. Please do your own due diligence before deciding to invest.
About NVIDIA
NVIDIA is a computer graphics processor and multimedia software design and manufacturing company. It operates in three segments: Graphics Processing Unit (GPU), Tegra Processor, and All Other. The GPU segment includes products such as GeForce, Quadro Tesla and DGX for AI data scientists and big data researchers, and GRID for cloud-based visual computing users. The Tegra Processor integrates an entire computer onto a single chip for various devices. The All Other segment covers stock-based compensation, corporate infrastructure and support costs, acquisition-related costs, legal settlement costs, and other non-recurring charges. NVIDIA was founded in 1993 and is based in Santa Clara, CA.
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