Here's How NVIDIA May Be Failing You

Margins matter. The more NVIDIA (Nasdaq: NVDA  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong NVIDIA's competitive position could be.

Here's the current margin snapshot for NVIDIA and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 NVIDIA

36.9%

3.6%

5.8%

 Intel (Nasdaq: INTC  )

65.3%

35.8%

24.7%

 Advanced Micro Devices (NYSE: AMD  )

3.0%

7.3%

20.0%

 Broadcom (Nasdaq: BRCM  )

50.8%

12.5%

14.6%

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where NVIDIA has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for NVIDIA over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 45.6% and averaged 38.8%. Operating margin peaked at 20.4% and averaged 8.7%. Net margin peaked at 19.5% and averaged 8.8%.
  • TTM gross margin is 36.9%, 190 basis points worse than the five-year average. TTM operating margin is 3.6%, 510 basis points worse than the five-year average. TTM net margin is 5.8%, 300 basis points worse than the five-year average.

With recent TTM operating margins below historical averages, NVIDIA has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market.  Got an opinion on the margins at NVIDIA? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Intel is a Motley Fool Inside Value recommendation. NVIDIA is a Motley Fool Stock Advisor selection. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (2)

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  • Report this Comment On December 01, 2010, at 3:16 PM, colt1210 wrote:

    Dear Seth

    I think you are comparing apples and oranges in your analysis. NVDA is a graphics chip maker. Intel is a computer chip maker that happens to also make graphic chips for their own motherboards. AMD is also a computer chip maker the same as Intel. Broadcom makes semi conductors. I do not see how the companies are peers.

  • Report this Comment On December 01, 2010, at 3:44 PM, morgatil wrote:

    I think he is referring to AMD's purchase of ATI. AMD and ATI are now one in the same.

  • Report this Comment On December 01, 2010, at 6:14 PM, TEBuddy wrote:

    If you cant see how NVDA, INTC, AMD and BRCM are competitors than you should not own any of these stocks.

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