Investment Jungle

Investment Jungle reader Rohan has requested that we have a look at NVIDIA Corporation which trades on the NASDAQ under the symbol NVDA. Does this high tech company have what it takes to be a Rule #1 stock?

Let’s find out.

Company Profile:

From Yahoo Finance

NVIDIA Corporation offers programmable graphics processor technologies worldwide. The company creates various products for computing, consumer electronics, and mobile devices. It offers its products under four groups: graphics processing units (GPUs), media and communications processors (MCPs), handheld GPUs, and consumer electronics. GPU product group includes products that support desktop personal computers, notebook personal computers, professional workstations, and other GPU-based products.

Market capitalization of $17.66B.

Fundamental Analysis:

Let’s bring out the Big Five for some show and tell!

The return on invested capital (ROIC) does not meet our standards as Rule #1 investors. there are many years ( 4 in fact) where the ROIC was below 10%. There were also 5 years where the ROIC was well above this mark. Inconsistency.

And the return on equity clearly shows a down trend. The 10 year average ROE is 17.01%. The 5 year rate drops to 12.93%. Not the trend I want to see.

Equity growth rate has been rather spectacular over all. The 8 year rate is a whopping 40.55%. The 5 year rate plummets to 15.87%. The 3 year rate bounces back to 20.54%. And last year’s rate was a healthy 27.48%. Nice uptrend over the last 5 years.

Earnings per share growth rate has been quite stellar. The 8 year rate is a phenomenal 42.91%. The 5 year rate drops to a respectable 25.86%. The 3 year rate skyrockets to 79.88%. And last year’s rate comes in at a great 40.35%. Lots of volatility in these numbers.

Sales growth rates show that same significant decline in 2003 and 2004. The 5 year rate is 14.87%. The 3 year rate climbs to 18.88%. And last year’s rate jumps to 29.17%.

Cash flow growth rates exhibit the same behaviour. Start off very strong, drop during the 5 year rate and then climb back up. In this case, the 8 year rate is 41.47%. The 5 year rate drops to 21.64%. The 3 year rate skyrockets to 53.6%. And last year’s rate was 35.23%. All very decent numbers.

These numbers all look pretty good. But they don’t exhibit the Rule #1 characteristics of trending upwards or at least maintaining their own. In 2003 and 2004, the company experienced issues which are reflected in the 5 year rate. This is consistent in all the growth rates.

Stock Analysis:

Let’s put a sticker price on this one if we can.

For the future EPS growth rate, I went with the conservative 5 year rate of 15.87% as my initial guess. The analysts are backing me up by forecasting 15.8%. I’ll use their slightly more conservative estimate.

For my future P/E, I will use the current P/E of 27.85. That is significantly lower than the historical 5 year average P/E of 38.67. With the drop in growth rates has come a compression of the P/E.

With this information, the sticker price works out to $35.05. At today’s price of $32.68, that works out to a slight discount of 6.75%. Of course, that also implies a premium of 86.5% over the MOS price.

Here is my Rule #1 analysis of NVDA.

Here is the 1 year stock price chart:

NVDA has had a very nice run over the last year.

Conclusion:

Does this meet our Rule #1 criteria? I would argue no. The consistency in the growth rates are not there. Does that mean this is a bad company. Absolutely not. It seems to have rebounded very nicely from the 2003 and 2004 lows. I am sure that there are other methodologies that will like this stock.

Full Disclosure: I do not own shares in NVDA.

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