There's no foolproof way to know the future for NVIDIA
A cloudy crystal ball
I often use accounts receivable (AR) and days sales outstanding (DSO) to judge a company's current health and future prospects. This is an important step to take in separating the pretenders from the market's best stocks. Alone, AR (the amount of money owed to the company) and DSO (days' worth of sales owed to the company) don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.
Sometimes, problems with AR or DSO simply indicate a change in the business (such as an acquisition), or lax collections. However, if AR grows more quickly than revenue or DSO balloons, that can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Or it can indicate that the company sprinted to book a load of sales at the end of the quarter, the way used-car dealers do on the 29th of the month. Sometimes, companies do both.
Why might an upstanding company such as NVIDIA do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.
Is NVIDIA sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO.
Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.
The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter (EOQ) receivables, but I've plotted both above.
Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars (DSO) indicates a trend worth worrying about. As another reality check, it's reasonable to consider what a normal DSO figure might look like in this space.
Advanced Micro Devices
Source: Capital IQ, a division of Standard & Poor's. DSO calculated from average AR. Data is current as of last fully reported fiscal quarter. LFQ = last fiscal quarter. Dollar figures in millions.
Differences in business models can generate variations in DSO, so don't consider this the final word -- just a way to add some context to the numbers. But let's get back to our original question: Will NVIDIA miss its numbers in the next quarter or two?
The numbers don't paint a clear picture. For the last fully reported fiscal quarter, NVIDIA's year-over-year revenue grew by 4.5% and its AR grew by 12.5%. That looks OK. End-of-quarter DSO increased by 7.7% over the prior-year quarter. It was down 7.7% versus the most recent quarter. Still, I'm no fortune-teller, and these are just numbers. Investors who put their money on the line always need to dig into the filings for the root causes and draw their own conclusions.
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt for the market's best returns. However, some investors actively seek out companies on the wrong side of AR trends in order to sell them short and profit when they eventually fall. Which way would you play this one? Let us know in the comments section below.
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Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings. He is a 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 pick. NVIDIA is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.