NVIDIA might seem like an odd choice for an investor seeking income, but what gets overlooked with this hot tech stock is the willingness of management to reward shareholders with dividends and share repurchases.
Gaming has been good to the graphics specialist. In 2016, NVIDIA raked in $4.06 billion in revenue, an increase of 44% over 2015 as the upgrade cycle to the latest high-end graphics processors got under way. Continued advances in gaming technology, higher-resolution displays, and the emergence of eSports provide nice tailwinds for demand over time.
In addition, NVIDIA has other promising growth opportunities emerging with the growing adoption of its high-end GPU technology by other industries for deep learning, artificial intelligence, and self-driving vehicle applications. The combined revenue from its Datacenter and Automotive segment could be the company's biggest business in the not-too-distant future.
In 2016, NVIDIA generated $830 million in revenue from its Datacenter segment, an increase of 145% over 2015, while the Automotive segment grew 52% to $487 million in revenue.
CEO Jen-Hsun Huang expects the next phase of growth in datacenter to come from several industries, including healthcare, retail, transportation, and life sciences, among others. Here's what he said on a recent earnings conference call:
The first adopters were hyperscale companies like Microsoft, Facebook and Google, which use deep learning to provide billions to customers with AI services that utilizes image recognition and voice processing. The next area of growth will occur as enterprise in such fields as healthcare, retail, transportation and finance embrace deep learning on GPUs.
NVIDIA's technology is essentially affecting every area of the economy, so how do you value a company like that?
The best way to evaluate the investment merits of a high-PE, high-growth business is to consider the market opportunity relative to the company's market capitalization. Intel believes the self-driving car market will be worth $70 billion by 2030 and could reach $100 billion. Compare that amount to the less than $500 million NVIDIA generated last year within its Automotive segment, and it's easy to understand the huge opportunity here -- and why NVIDIA's stock has rocketed to the stratosphere.
While NVIDIA's multibillion-dollar growth opportunities get all of the headlines, the vision and business skills of its management team, led by CEO Jen-Hsun Huang, get overlooked. Jen-Hsun Huang is the founder of the company and the reason the company is where it is today. He's also been a very shareholder-friendly leader willing to reward shareholders with the company's excess cash flow, something you don't see very often with relatively small companies in technology.
The company has consistently paid out a growing dividend since it was initiated in 2012. Over the last three fiscal years, NVIDIA has distributed 83% of its free cash flow to shareholders through dividends and share repurchases. It's a good signal from management that they expect the company to continue growing in the future.
NVIDIA currently offers a dividend yield of 0.5%; however, the quarterly dividend has nearly doubled over the last four years. As the business continues to grow and generate more cash from operations, the dividend could double again in the next five years, which would put the dividend yield then at 1% on today's share price.
The Apple logo is as recognizable as The Coca-Cola Co logo, Nike's swoosh, or the golden arches. Once you own at least two Apple devices, it's very likely you are hooked for life.
Over the last four quarters, Apple generated $218 billion in total revenue and $45 billion in profits. The key driver of Apple's growth is iPhone sales, which made up 69% of total revenue in the first fiscal quarter of 2017.
The most important thing for investors to know about is Apple's huge financial advantage over its competitors. Apple earned every penny of the smartphone industry's profits in 2016 while commanding less than 20% market share of unit sales. Absorbing all of the profits among smartphone makers gives Apple an enormous competitive advantage to reinvest in more advanced features, digital content, and other services, making the Apple ecosystem even stronger over time.
As Apple sells more devices, it should boost services revenue from iTunes, Apps, Apple Music subscriptions, and other digital content over time. Services revenue has been Apple's fastest-growing segment recently. In the holiday quarter, Services grew 18% year over year to $7.1 billion, bringing the trailing-12-month amount to over $25 billion.
Apple generates robust cash flows, and the cash has been piling up on the balance sheet in recent years. At the end of December 2016, Apple had about $46 per share in cash and marketable securities. This is 33% of the current stock price.
The cash-rich balance sheet gives management a lot of flexibility not only in running the business, but in how it chooses to reward shareholders. Apple has paid a steadily increasing dividend for about five years, as well as regular share repurchases to reduce the share count and boost earnings-per-share growth. The share buybacks have also been very timely thanks to the conservative valuation on the stock in recent years.
Analysts expect earnings to grow about 9% annually over the next five years, and investors are not paying much for future growth, with the stock currently sitting at 17 times earnings. The stock's dividend yield is currently 1.6%. Even after the stock's recent 30% to 40% increase, it still looks attractive.
Investors may not hit a home run with Apple given its nearly $1 trillion market value, but the business has a brand customers love, and it generates a lot of cash, and this should leave shareholders with a decent return over time.
John Ballard owns shares of Nvidia. The Motley Fool owns shares of and recommends Apple, Nike, and Nvidia. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Coca-Cola. The Motley Fool has a disclosure policy.