Is This the Best Chip Stock to Buy Now?

More than anything else, managers determine returns. They set strategy, hire key team members, oversee operations, and cash paychecks. Every move they make either enhances or destroys shareholder capital.

It pays to know who these men and women are, how they're paid, whether they, too, are owners, and how they perform versus competitors in certain key metrics. In this regular column, I'll examine all that and more with the goal of enhancing our understanding of some of the top stocks in Fooldom.

Next up: NVIDIA (Nasdaq: NVDA  ) . Is the executive team of this would-be chip champion doing all it can to earn you outsized returns?

Foolish facts

Metric

NVIDIA

CAPS stars (out of 5) ****
Total ratings 5,204
Percent bulls 95.4%
Percent bears 4.6%
Bullish pitches 810 out of 863
Highest rated peers Cypress Semiconductor, Actions Semiconductor, Alpha & Omega Semiconductor

Data current as of Feb. 23.

For a long while I just didn't get NVIDIA. All that changed when I went to last month's Consumer Electronics Show. So many smartphone and tablet partners were ready to adopt its Tegra mobile processors that I felt compelled to name the stock one of the four best buys coming out of CES.

I've been right so far. Shares of NVIDIA have outpaced the S&P 500 index by 11 percentage points from the day that column went live, thanks mostly to a very strong earnings report. The chipmaker's $0.23 in fourth-quarter profit was 44% higher than Wall Street's consensus estimate.

Investors have good reason to expect further gains. Motorola Mobility's (NYSE: MMI  ) Xoom tablet and Bionic and Atrix smartphones are receiving excellent reviews because of their speed. NVIDIA's Tegra chips give these devices horsepower.

And that's important. Design wins are everything in the chip business and Motorola is one of the highest-profile Android partners. Tegra's success with Moto could lead to success with others. Just don't expect peers Qualcomm (Nasdaq: QCOM  ) and Texas Instruments to sit idle. Qualcomm's history serving flagship Android devices dates back to the Nexus One handheld.

Advanced Micro Devices (NYSE: AMD  ) also said it planned to make a run at the mobile market when it parted ways with CEO Dirk Meyer last month. NVIDIA faces a formidable list of Tegra competitors. The good news? NVIDIA's mobile opportunity doesn't begin and end with Android.

At CES, Microsoft (Nasdaq: MSFT  ) announced plans to incorporate the ARM architecture into new Windows-based PCs. It's a long overdue move that could benefit NVIDIA more than most, presuming the company's "Project Denver" proves to be a success. The code-speak refers to an internal initiative for uniting a central processor (CPU) and a graphics processor (GPU) on a single chip using the ARM instruction set.

Management overview

Executive

Years

Cash Compensation

Shares Owned**

Jen-Hsun Huang, co-founder and CEO 18 $7,145 307,676
David White, chief financial officer 2 $675,495 25,000
Deborah Shoquist, EVP of operations 4 $267,946 61,832
Ajay Puri, EVP of worldwide sales 6 $333,671 74,311

Source: Capital IQ, a division of Standard & Poor's. (Data current as of Feb. 24.)
* As an employee.
** Direct holdings only.

Like shareholders, management has plenty to gain if Project Denver succeeds. CEO and co-founder Jen-Hsun Huang, in particular, since he still owns 3.4% of the business (after considering his holdings in a trust) and receives the majority of his annual compensation in stock options.

Last year, he was awarded $3.475 million worth of options and paid $1 in salary after taxes and benefit contributions. CFO White received $2.2 million in options awards while Shoquist and Puri received $611,700 and $666,225, respectively, in options during 2010.

I've no problem with these sorts of grants, so long as the strike price is fair and management doesn't abuse shareholder capital sopping up options-driven dilution when the stock is priced above fair value.

So far, they haven't. NVIDIA's stock has outperformed the S&P 500 by more than 50 percentage points over the past five years. Buybacks have created value for common shareholders.

Management analysis versus competitors

Company

Insider Ownership

Gross Margin

ROC*

ROE**

Advanced Micro Devices 4.16% 45.6% 7.1% 56.7%
Intel (Nasdaq: INTC  ) 0.05% 65.3% 20.3% 25.2%
MIPS Technologies (Nasdaq: MIPS  ) 0.63% 98.2% 23.6% 34.7%
NVIDIA 4.01% 39.8% 4.2% 8.7%

Source: Capital IQ, a division of Standard & Poor's. (Data current as of Feb. 24.)
* Return on capital.
** Return on equity.

On the basis of ownership and management efficiency NVIDIA isn't even close to the best buy on this list. MIPS Technologies, on the other hand, looks every bit the Rule Breaker some believe it could be.

I'm a fan of MIPS. I saw the company and its products at CES and I like that it, too, is competing for design wins in Android smartphones for here and abroad. It's a potentially meaningful catalyst for a company that has spent more than two decades designing chip architectures for consumer electronics.

And yet I'm about as enthusiastic about NVIDIA as I am MIPS. Margins are rising right alongside returns on capital, and known catalysts (i.e., Android, Project Denver) should foster massive growth over the next three to five years -- potentially much more than the 17% annual profit gains analysts expect.

Do you agree? Disagree? Let us know what you think about NVIDIA's processors, competitive positioning, valuation, and the likelihood of Project Denver succeeding using the comments box below. You can also rate NVIDIA in Motley Fool CAPS.

Interested in more info on the stocks mentioned in this story? Add Advanced Micro Devices, Intel, MIPS Technologies or NVIDIA to your watchlist.

NVIDIA is a Motley Fool Stock Advisor selection. Cypress Semiconductor is a Motley Fool Rule Breakers recommendation. Intel and Microsoft are Motley Fool Inside Value pick. Motley Fool Options has recommended members open diagonal call positions in Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. 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 owns shares of Intel, Microsoft, and Qualcomm and has a position in Intel calls. The Fool is also on Twitter as @TheMotleyFool and its disclosure policy is managing just fine, thanks.


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