Investors waiting for NVIDIA (NASDAQ:NVDA) stock to break free got their wish last year when the shares soared 60%, trouncing the S&P 500's 2% loss during the same period. It's down less than 1% since; yet that still beats the S&P, which is down more than 3% since the start of 2016.
All signs point to NVIDIA being a winning hold right now; but is the stock actually worth buying? Not if you consider the alternatives.
Gaming your portfolio
In this case, "alternatives" refers to the various makers of video games and entertainment whose stocks you can buy instead of NVIDIA. Seem like a weird comparable? Here's why it isn't: Graphical process units (GPU) that make the video gaming experience on consoles and laptops more awesome still account for more than 80% of NVIDIA's revenue, and 100% of its operating profit.
Efforts to diversify beyond gaming consoles haven't taken hold at the rate NVIDIA would have liked. For example, revenue from the company's Tegra line of mobile processors dropped sharply in 2014 (down 48%), and again last year (down 3%). Smartphone and tablet makers have bet on other chipmakers despite the technical advantages of the Tegra design. Last year's huge recall of the Tegra-powered SHIELD gaming tablet can't be helping the marketing effort.
Two better buys that will help you level up
Even so, there's a lot to like about NVIDIA as a video-game stock. Not only does the company make essential equipment for pro gamers, but it also pays a dividend that yields 1.45% as of this writing.
So what's the problem? NVIDIA lacks any sort of long-tail intellectual property (IP) that will keep paying off, even when there are no new products to market. Both of these stocks are better positioned in that regard:
- Activision Blizzard (NASDAQ:ATVI). Holder of some of the most impressive IP in the business, Activision Blizzard makes the Call of Duty, World of Warcraft, and Skylanders lines, among others. Efforts at brand expansion include significant bets on e-sports, and a Warcraft movie in June from production partner Legendary, and distributor Universal Pictures. Best of all, CEO Bobby Kotick is in the early stages of a capital return plan that included a recent 13% bump in the company's annual dividend payout. Further increases could come if Kotick and his team figure out how to squeeze more profit from Activision's $5.9 billion acquisition of mobile games maker King Digital. And that's just one of many potential catalysts in the works.
- Take-Two Interactive (NASDAQ:TTWO). Maker of what may be the most popular -- and most profitable -- console game in recent history, Take-Two's Grand Theft Auto franchise has proven that it's possible to cash in on a video game brand even when there's no new console versions to sell. GTA Online, a web-based, multiplayer companion pack to Grand Theft Auto V, routinely draws 8 million players a week, and set a record for revenue and active engagement during the most-recent holiday season. Cash flow has normalized as a result of these consistent gains. Specifically, cash flow from operations has come in above $100 million in four of the last five quarters -- a mark achieved only four times in the prior four years. Mix in popular sports-themed titles, a new publishing arm, and an IP licensing deal with Lions Gate Entertainment, and you've got the makings of an emerging entertainment titan.
Wait for better days
Finally, let's talk about valuation. NVIDIA stock trades for more than 30 times earnings. That wouldn't be so bad if analysts tracked by S&P Capital IQ were expecting robust growth, or known catalysts were in place, ready to push the stock higher. Instead, they're modeling for profits to expand by less than 11% annually during the next three-to-five years. The delta suggests NVIDIA stock is priced for growth that it can't reasonably achieve.
NVIDIA is a good business that may foster new catalysts. Till then, this is a richly valued stock that's unlikely to outperform -- especially when compared to peers like Activision and Take-Two.