NVIDIA Corp. (NASDAQ: NVDA) engages in the design and manufacture of computer graphics processors, chipsets, and related multimedia software. The company was founded in 1993 and is headquartered in Santa Clara, CA. The company makes some of the best graphics cards in the world, powering everything from gaming and crypto mining to artificial intelligence (AI).
NVIDIA Corporation's stock is trading at $132 as of Oct 6, 2022. Year-to-date (YTD), the stock is down by 56%.
But is NVIDIA Corporation worth considering as a long-term investment? Let’s take a look at the company’s outlook based on the most recent financial data to see if we can get any insights.
Why are fundamentals important?
Analyzing a company’s fundamentals gives us key insights into whether or not the company will be a good long-term investment.
Investors have relied on fundamentals for decades to assess the financial health of an organization as well as its growth prospects. They are a set of key metrics that, when looked at holistically, can tell us whether or not a company is likely to be a good investment over the long term.
There are potentially dozens of fundamental metrics to analyze, but we like to focus on price-to-earnings ratio (P/E ratio), earnings per share (EPS), price-to-sales ratio (P/S ratio), and debt.
What do NVIDIA Corporation’s fundamentals tell us about the investment opportunity? Let's have a look.
Read: Growth Opportunities in Advanced Semiconductor Tech
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NVIDIA Corporation's stock by the numbers
First of all, let's look at EPS, which indicates how profitable a company is on a 'per share' basis. This metric is calculated as net income (after dividends on preferred stock) divided by the number of outstanding shares.
NVIDIA Corporation's EPS is $3.42, based on its full-year outlook for fiscal 2023, falling from $4.44 in January 2022. A 23% decline in EPS is not a good sign.
Analyzing a company's price-to-earnings (P/E) ratio is also helpful in telling us how cheap or expensive a stock is or how much of a premium investors are willing to pay for a company's earnings. It is calculated by taking the price of a stock and dividing this by the EPS. A higher ratio suggests that the stock is expensive in relation to its earnings, and a lower ratio indicates the opposite.
NVDA has a P/E ratio of 43.3x, based on its most recent financial statements. This is 157% higher than the average P/E ratio across an industry benchmark, which is 16.84x, and this indicates that the stock is quite expensive in relation to how much it earns. NVIDIA's P/E is, however, 18% below its 5-year-average of 52.9x.
Next, let's look at one of the most common valuation metrics - the P/S ratio. It is calculated as the current price divided by sales for the previous 12 months and helps us get a sense of how much investors are willing to pay for a company's revenues on a 'per dollar' basis.
The company's P/S ratio is currently 11.2 based on its last reported filings. Compared to the sector-wide average of 2.6, this is 330% higher, indicating that the stock may offer quite a bit less value compared to other companies in the same sector.
Next, let's look at NVIDIA Corporation's price to book value (P/BV), which tells us how much investors are willing to pay for a company's assets. P/BV is used by value investors to identify potential investments and is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book').
NVIDIA Corporation's P/BV is 13.8, based on figures from its last reported balance sheet, which is 253% higher than the industry benchmark of 3.9.
Finally, it's always worth looking at a company's debt profile before deciding to invest in order to assess the risk. A high amount of debt can be a problem if a company is not generating enough cash flow to service its debt, and some sectors rely on debt more heavily than others.
NVIDIA Corporation has total debt of $11.8bn, and this has increased by 51% over the past year. The company also has cash & short-term investments totaling $17bn on-hand.
What constitutes an acceptable level of total debt can vary considerably among different industries, but NVIDIA Corporation's current levels of net debt don't worry us, as the company is not using debt to fund its operations, which is good to see.
Is NVIDIA Corporation a buy?
All in all, we’ve noticed some trends at NVIDIA Corporation that reduce our confidence in the company’s potential as a long-term investment opportunity.
In particular, the stock is down by 56% YTD, and the company has a higher P/E ratio, higher P/BV and higher P/S ratio compared to competitors within the same industry.
There are also macro headwinds to consider. NVIDIA manufactures its chips in Taiwan, where geopolitical tensions are running high. The company has also heavily leveraged its pricing power in recent years, but that's not going to be so easy in an inflationary environment. Plus, part of its market in recent years has come from the crypto-mining community, which faces its own set of challenges.
Government regulators are increasingly scrutinizing tech giants such as NVIDIA. Its potential acquisition of ARM had to be abandoned due to mounting regulatory challenges.
Nevertheless, NVIDIA is still a great company, and at a lower valuation, it could be a long-term winner. The NVIDIA supercomputer is one to watch as it begins training self-driving cars, advancing healthcare research, and tackling climate change.
Paresh Kharya, senior director of product management and marketing at Nvidia, said:
Eos will offer an incredible 18 exaflops of AI performance, and we expect it to be the world’s fastest AI supercomputer when it’s deployed,
Keep in mind that this analysis is general in nature. No single ratio or number will give you all of the information you need, and they must be weighed along with other considerations. Please conduct your own due diligence before deciding to invest.
Article updated October 6, 2022.