Shares of NVIDIA (NVDA -10.01%) plunged nearly 20% on Nov. 16 after the chipmaker posted its first revenue miss in three years and offered weak guidance for the fourth quarter. Its revenue rose 21% annually to $3.18 billion, but missed estimates by $60 million, representing the company's slowest growth in over two years. Its non-GAAP EPS rose 38% to $1.84, beating expectations by $0.13.
For the fourth quarter NVIDIA expects its revenue to fall 7% annually at the midpoint, compared to expectations for 17% growth. NVIDIA attributed the shocking miss to the end of the cryptocurrency mining boom and a higher inventory of mid-range Pascal GPUs throttling its core gaming revenues, which rose 13% annually but slipped 2% sequentially.
Image source: Getty Images.
As a consolation prize, NVIDIA raised its quarterly dividend 7% to $0.16 per share, which equals a forward yield of 0.4%. That's an anemic payout compared to chipmakers like Intel (INTC -2.40%) and Texas Instruments (TXN -2.44%), which pay forward yields of 2.5% and 3.3%, respectively. I think NVIDIA can afford to boost its yield to comparable levels for three simple reasons.
1. A ridiculously low payout ratio
Analysts expect NVIDIA to generate $7.36 in earnings per share this year (which ends on Jan. 28). It paid out $0.45 per share over the past three quarters, and its latest dividend hike will boost its annual payout to $0.61 per share -- or just 8% of its estimated earnings for the year.
For comparison, Intel and Texas Instruments paid out 36% and 52% of their earnings, respectively, over the past 12 months. If NVIDIA paid out 50% of its earnings as dividends instead, its forward yield would jump to 2.2% -- which might make the stock more appealing to income investors.
2. A good dividend beats a bad buyback
NVIDIA clearly favors stock buybacks over dividends. During the first nine months of fiscal 2019, it spent $855 million on buybacks but just $273 million on dividends. It also authorized an additional $7 billion in buybacks, bringing its total authorization to $7.94 billion through Dec. 2022.
However, NVIDIA's stock declined 15% this year, indicating that its buybacks were poorly timed. There were already plenty of red flags -- NVIDIA's stock was at historical highs, its PE ratio hovered in the 40s and 50s for most of the year, the crypto boom seemed dangerous for inventories and year-over-year comparisons, and the semiconductor market was facing a cyclical decline.
Image source: Getty Images.
Therefore, it was reckless and wasteful for NVIDIA to buy back its shares, and that cash would have been better allocated toward bigger dividends.
3. The days of easy growth are over
NVIDIA's stock rallied over 80% in 2017 on three main tailwinds: new high-end games and crypto miners simultaneously boosting GPU demand, connected cars and the Nintendo Switch lifting sales of its Tegra CPUs, and companies buying its high-end data center GPUs for machine learning and AI tasks.
However, all of those tailwinds are now becoming headwinds. Waning interest in crypto mining, exacerbated by competition from ASIC-based miners, is flooding the market with cheap GPUs. Many gamers already upgraded their PCs, and sales of the Nintendo Switch are slowing down.
Some analysts are questioning long-term growth forecasts for driverless cars after a series of accidents, and NVIDIA faces escalating competition in the automotive market from rivals like Intel and NXP Semiconductors. Recent privacy debacles and algorithmic issues at tech giants like Facebook raise serious concerns about the rush to automate tasks with AI solutions. Its OEM and IP business also lost $66 million in quarterly revenues after the expiration of its cross-licensing deal with Intel last year.
The revenue growth from NVIDIA's main end markets in recent quarters tells a clear story: The days of easy growth are over, and investors should brace for a rough ride next year.
|
Q4 2018 |
Q1 2019 |
Q2 2019 |
Q3 2019 |
|
|---|---|---|---|---|
|
Gaming |
29% |
68% |
52% |
13% |
|
Professional Visualization |
13% |
22% |
20% |
28% |
|
Data center |
105% |
71% |
83% |
58% |
|
Automotive |
3% |
4% |
13% |
19% |
|
OEM and IP |
2% |
148% |
(54%) |
(23%) |
|
Total |
34% |
66% |
40% |
21% |
YOY revenue growth. Source: NVIDIA quarterly reports.
It's time to reward patient investors
NVIDIA should be fine over the long term after it moves past the near-term volatility of the crypto market, stabilizes its inventories again, and launches new products. But even NVIDIA admits that it could take one or two quarters for its gaming business to stabilize, and the stock should remain under pressure until that happens. If NVIDIA significantly raises its dividend, it could lock in existing investors and attract new ones -- which would stabilize its stock more effectively than poorly timed buybacks.
