Analysts Debate: Is NVIDIA a Top Stock?

The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.

In that spirit, we three Fools have banded together to find the market's best and worst stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing NVIDIA (NASDAQ: NVDA  ) , one of the world's leading graphics chip makers -- and a growing presence in mobile devices.

NVIDIA by the numbers
Here's a quick snapshot of the company's most important numbers:

Statistic

Result (TTM or Most Recent Available)

Market cap 

$7.6 billion

P/E and forward P/E

14.3 and 11.8

Revenue

$4.3 billion

Net income

$563 million

Free cash flow

$641 million

Return on equity

12.5% 

R&D ratio

26.8%

Market share

  • Discrete graphics processors: 17% 
  • Smartphone applications processors: 5% 
  • Tablet applications processors: 17% 

Sources: Morningstar, YCharts, and news reports.

Alex's take
I think NVIDIA has a lot going for it, but there are a few reasons for caution, as well. For one thing, the company is finally making moves into integrated smartphone processors with the Tegra 4i, its first with LTE capability. That will take the fight to longtime integrated-smartphone-chip category killer Qualcomm and its Snapdragons. NVIDIA also happens to be the top chip maker for Google's Android tablets. That doesn't mean as much today as it's likely to in the future, as lower-cost tabs undermine the iPad's dominance.

On the flip side, NVIDIA isn't actually a category leader anywhere. Apple still dominates tablet chips by dint of its in-house chip designs. Qualcomm owns smartphone processors. You might think that NVIDIA leads in PC graphics chips, but that's not true, either -- Intel has a commanding lead in that segment, serving 63% of the GPU market to NVIDIA's 17% in the fourth quarter of 2012. The Tegra 4i might change NVIDIA's fortunes in smartphones, but the company remains heavily reliant on its legacy graphics processors, as 81% of 2012 revenues came from the GPU segment. The Tegra segment has a long way to go to take over as NVIDIA's moneymaker.

In the end, after doing a detailed analysis of what I felt were NVIDIA's strengths and weaknesses, I've decided that it's best to stay on the sidelines until the company's future becomes clearer. To see how I arrived at this decision, click here to read my full report.

Sean's take
NVIDIA has moved well beyond being just a graphics company, despite Wall Street's instance on valuing the company as if its Tegra line of processing chips has no value whatsoever. In recent years, NVIDIA has managed to infiltrate a market dominated by Qualcomm's Snapdragon processor in top-line smartphones – specifically Google's Android OS – and Broadcom's processors in lower-end 3G smartphones. Not only has NVIDIA jumped right in, but it's having immense success, as is demonstrated by its 50% growth in Tegra chip revenue for smartphones and tablets in its most recently reported quarter.

The road ahead for NVIDIA won't be easy, as it's planning to move into a very crowded cloud-gaming sector with its Project Shield handheld gaming console set for release next year. It's also still dealing with weakness from its graphics division, which is struggling with declining PC sales. Yet, for all of the concern directed at NVIDIA's graphics segment, it still grew its market share to 65% last year.

When push comes to shove, NVIDIA's amazing cash balance and innovation gives it an edge that I feel Wall Street simply hasn't recognized and come to appreciate. I would be more than willing to support making a CAPScall of outperform at these levels. To read my thorough analysis of NVIDIA, click here.

Travis' take
As Alex and Sean have pointed out, NVIDIA has a lot of upside if everything goes right. But let's not forget that revenue was down sequentially last quarter, and it's expected to be down again this quarter, so the trends aren't exactly in the company's favor.

I don't like the declining trends in PCs or gaming consoles, and think Project Shield is a money pit if I've ever seen one. The flip side is the amazing balance sheet Sean points out. You can't ignore $3.7 billion in cash, with no debt. The 4G LTE Tegra chips are also a huge upside but, as I said yesterday, I'm worried about market leader Qualcomm, as well as the immense capabilities of Intel encroaching on the market. NVIDIA is playing the role of David versus two Goliaths.

In the end, I'm taking a cautious approach, because I see too many challenges ahead in PCs, gaming, and tablets. Assuming fantastic growth in the Tegra line is risky for investors and, if it doesn't pay off, there's still downside. And the bigger problem is that Tegra is the only major upside, so NVIDIA essentially has its eggs in one basket.

On a strictly value play, I'll vote for a $11 limit buy, which is below the stock's 52-week low. I think that gives enough downside protection to compensate for the risk I think NVIDIA's business holds. Click here to read my detailed analysis of NVIDIA.

The final call
We seem to be split, but with enough of a bullish lean to at least make a call. Sean's ready to put a thumbs-up on NVIDIA today, but with Travis waiting for a better price, we'll have to split the difference between the current share price, and Travis' recommendation of an $11 limit. That means we'll be waiting for an $11.50 share price. It could happen, especially in a wider market decline, but we could also miss out on some big gains. If you're interested in keeping track of our performance, you should take a look at our TMFYoungGuns CAPS page, where we're beating the index by over 300 points, with 24 picks over the course of 13 months.

NVIDIA was ahead of the curve launching its mobile Tegra processor, but investing gains haven't followed as expected, and the company has struggled to gain share in the smartphone market. The Motley Fool's brand-new premium report examines NVIDIA's stumbling blocks, but also homes in on opportunities that many investors are overlooking. We'll help you sort fact from fiction to determine whether NVIDIA is a buy at today's prices. Simply click here now to unlock your copy of this comprehensive report.


Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 04, 2013, at 10:03 PM, jwtrotter wrote:

    The comments about entry point for buying shares now is getting tired and outdated. The stock is in a tighter range now between $12 & $13/share. I think your article's is more influenced by the greed of a short-term swing trader's mentality, not long-term investing. Looking forward to the day when this kind of game, always expecting that low bottom to go another dollar more then at present, fades and it is made clear that this company need not be hampered by the short-term nickel and dime mentality.

  • Report this Comment On April 08, 2013, at 10:31 AM, rsinj wrote:

    Totally agree jwtrtotter.

    If Travis says buy at $11 purely as a value play, then it's much different at $12? Let's assume we buy at $11 (assuming it ever gets there), then what when the stock goes back to $12? Sell? Pathetic reporting.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2347668, ~/Articles/ArticleHandler.aspx, 11/24/2014 9:23:22 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement