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Nvidia Corporation

Nvidia Corporation

Macroeconomic and Industry Environments

NVidia Corporation operated in the information technology sector in the industry of semiconductors and semiconductor equipment (www.bloomberg.com n.a.). The company is subject to such macroeconomic risks as intense competition, market changes, system security, and volatility of expenses. Based on market capitalization, NVidia is the fifth largest entity in its industry. Still, such strong competitors as Intel Corporation, Taiwan Semiconductor Manufacturing, and Broadcom Ltd. can significantly impact on performance of the company both through price competition and by creating new more demanded products and technologies (www.barchart.com n.a.). Changes in the market have macroeconomic effect on any company as it is influenced by demand volume, external regulations, political stability, foreign exchange fluctuations and other factors. Specific macroeconomic factor for NVidia Corporation is information security and related developments and regulations as it possesses over 7 thousand patents and heavily invests in research and development projects. Suppliers also have macroeconomic power for NVidia by defining prices that can be related to volatile costs of raw materials and labor expenses.

Although the corporation reported in its annual 10-K form for the year 2015 that its sales were typically higher in the second quarter, the business on overall is not cyclical. The reason behind that directly relates to the industry of NVidia. The corporation operates in technology sector that does not represent any notable business or seasonal cycles.

In general, the technology sector, in particular semiconductors industry, demonstrated outstanding growth over the past two decades and continues to have positive trend today. NVidia Corporation has primary SIC code 5063 that stands for “Electrical apparatus and equipment wiring supplies, and construction materials” and primary NAICS code 423610 that is “Electrical apparatus and equipment, wiring supplies, and related equipment merchant wholesalers” (www.siccode.com n.a.). Over the past year, information technology industry experienced 0.89 % growth compared to the previous year while semiconductors industry increased by 0.73% in terms of weighted average intraday return on shares of all traded companies (www.bloomberg.com n.a.).

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Corporate Background

The corporation was created in 1993 by Curtis Priem, Jen-Hsun Huang, and Chris Malachowsky with the headquarters in Santa Clara, California (www.nvidia.com n.a.). The company went public in 1999 on NASDAQ being incorporated in Delaware and with the no-par valued stocks (par value of $0.001 per share). In the year 2015, shares if NVDA were highest quoted at $33.94 and lowest quoted at $18.94 (NVidia 2016). By the first quarter of 2007, the corporation achieved its first billion US dollars in sales revenue and was named by Forbes as “Company of the Year”. NVidia is a corporation governed by the Board of 12 independent directors and three committees (Compensation, Audit, and Nominating and Corporate Governance). It is on general status for tax purposes. Activities of the company are mostly international with close cooperation with other technological corporations, computer and game hardware producers, and automobile companies.

Revenues of NVidia Corporation are generated through four main product lines which include professional visualization, automotive, datacenter, and gaming markets (NVidia 2016). The total revenue of the company continuously increased over the past five years to reach $5,010 million in 2015 while net income constituted $614 million in the same year providing based earnings per share equal to $1.33. Most of the revenues are generated by its GPU reportable segment that covers gaming and visualization product lines. Geographically, most revenues of the company come from Taiwan (nearly 40%), China (16%), other Asia Pacific countries (15%), and the USA (13%) (NVidia 2016). Strategy of the corporation is attaining and holding the position of the global leader in GPU-accelerated computing. It selected the approach of becoming a vertically integrated supplier for the largest technological companies using its products building strong partnerships with IBM, Apple, Intel, and Audi corporations. Alongside, the main success factor of NVidia is research and development of new unique products that not only reflect the market expectancies but rather shape future demand and preferences of customers.

Corporate Governance

As reported by the corporation, in 2015, 11 of 12 members of the Board of Directors in NVidia were independent demonstrating high separation between management and ownership in the company. Management reports to the owners and the market is a range of published data including required by the Securities and Exchange Commission annual report 10-K and quarterly reports 10-Q (providing financial statements, risk position overview, and a range of disclosures on ownership and management of the company), proxy statements (that incorporate detailed explanation of compensation and composition of the Board of Directors), and corporate responsibility reports (covering social and strategic issues). Chief Executive Officer of NVidia is its co-founder Jen Hsun Huang since 1993 when the company was founded. Michael G. McCaffery is the Chairman and the managing director at the corporation. The position of the Chief Financial Officer is held by Colette Kress since 2013.

Stockholders

Currently, the corporation has 785 registered shareholders (www.nasdaq.com n.a.). Out of 460 million shares, 85.30 % are held by institutional shareholders, 5.85 % by insiders, and the remaining by individuals. The main institutional shareholders are FMR LLC (17.33 %), Vanguard Group Inc. (9.0 %), Primecap Management Co/Ca (5.49 %), Massachusetts Financial Services Co/Ma (3.67%), and State Street Corporation (3.14 %) (www.nasdaq.com n.a.).

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Risk and Return

The company is rather low risk for investors as it is one of the market makers with strong and recognized brand name and adequate diversification of operations. Still, the company considers competition as its main risk factor due to the fact its competitors have very strong market capitalization and significant market share in semiconductor industry. The risk may occur if competitors provide less costly and lower priced similar products or develop new more demanded products. Moreover, the corporation is highly dependent on the cost of research and development as it needs to innovate continuously that requires input of highly qualified labor and unique raw materials. Besides, business model focused on research and development only may lead to inappropriate cost and inventory management policies and inability to follow the market changes. There is the risk of losing a significant number of customers as the corporation generates considerable portion of its revenues from the licensing agreement with Intel that terminates in 2018. Finally, NVidia is highly exposed to the information security risk having registered almost 8 thousand patents on its products and inventions as its revenues and reputation may be critically impacted in case of security breaches and cyber-attacks.

The company’s beta is 1.52 (www.nasdaq.com n.a.). This suggests that the company’s stock quote is expected to be more volatile than the S&P 500 that includes NVDA stock. The latest closing price of NVDA on NASDAQ is $91.88 (www.nasdaq.com n.a.).

Stock of the company provides both dividend and capital yields for its investors. Dividend yield in the past year constituted only 0.63 % (www.barchart.com n.a.). At the same time, capital gains were among the most notable in the US market. Thus, the share price of NVDA has increased by 35.98 % over the past month, by 46.94 % of the past quarter, and by 172.24 % over the past year (www.barchart.com n.a.). In the year 2015, the corporation generated $614 million in net profits providing ROE of 13.74 % and ROA of 8.33 %. The growth of the current share price is more related to recently reported quarterly results as only in the first three quarters of 2017 the corporation obtained $1,012 million in net profits that improved its ROE to 19.01 % and ROA to 10.53 %.

Table 1.

Key financial metrics of NVidia Corporation

Best Bid/Ask

N/A / N/A

1 Year Target

85

Today’s High /Low

$ 92.61 / $ 89

Share Volume

15,057,125

50 Day Avg. Daily Volume

11,416,374

Previous Close

$ 88.45

52 Week High/Low

$ 95.2499 / $ 24.75

Market cap

$ 49,523,320,000

P/E Ratio

48.1

Forward P/E(1y)

35.67

Earnings Per Share (EPS)

$ 1.91

Annualized dividend

$ .56

Ex Dividend Date

11/23/2016

Dividend Payment Date

12/19/2016

Current Yield

0.63 %

Beta

1.52

NASDAQ Official Open Price

$ 89.99

Date of Open Price

Dec. 5, 2016

NASDAQ Official Close Price

$ 91.88

Date of Close Price

Dec. 5, 2016

Community Sentiment

Bullish

Source: www.nasdaq.com (n.a.).

Valuation

P/E Current

81.90

P/E Ratio (with extraordinary items)

48.21

P/E Ratio (without extraordinary items)

27.12

Price to Sales Ratio

3.33

Price to Book Ratio

3.53

Price to Cash Flow Ratio

14.18

Enterprise Value to EBITDA

38.56

Enterprise Value to Sales

7.19

Total Debt to Enterprise Value

0.11

Efficiency

Revenue/Employee

542,972.00

Income per Employee

66,544.00

Receivables Turnover

10.24

Total Asset Turnover

0.69

Liquidity

Current Ratio

2.57

Quick Ratio

2.40

Cash Ratio

2.14

Profitability

Gross Margin

56.11

Operating Margin

18.92

Pretax Margin

14.83

Net Margin

12.26

Return on Assets

8.43

Return on Equity

13.82

Return on Total Capital

10.41

Return on Invested Capital

11.83

Capital Structure

Total Debt to Total Equity

33.79

Total Debt to Total Capital

25.26

Total Debt to Total Assets

20.49

Long-Term Debt to Equity

2.17

Long-Term Debt to Total Capital

1.62

Source: www.marketwatch.com (n.a.).

The corporation has enormously high price to earnings ratio showing that investors either overestimate the company’s performance or believe that the company will provide exceptional results in the current year. As NVidia reports net margin of 12.26 and above average current ratio of 2.57, it can be concluded that NVDA shares represent a very valuable investment on the market with low risk and exceptional return. Additionally, the corporation utilizes low leverage ratio of 2.17 and generates $66.5 thousand of net income per employee. Market capitalization of NVidia Corporation constitutes $49.52 billion at the moment.

Daily time series of NVDA

Fig. 1. Daily time series of NVDA – 12 months.

Source: www.nasdaq.com (n.a.).

The considerable decline in the share price in February 2016 occurred just after the release of the year-end results for the financial year 2016 (ended January 31, 2016). Although the company generated net profit that was higher than in the previous year, it was obvious that investors anticipated better financial results from the corporation. Similarly, the notable increase in the stock price in November 2016 occurred after presentation of the financial results for three quarters of the financial year 2017 when the net profit reported to be 2.5 times higher than for three quarters of the financial year 2016.

Basic Corporate Valuation

Calculation of the NVDA stock price and NVidia enterprise value as at January 31, 2016 (for the financial year 2016) is provided below in table 2.

Table 2.

Calculation of NVDA value.

INPUT AND ASSUMPIONS

 

 

           

 

 

 

           

1

Sales (Revenues), $ Millions, 2016

5010

           

2

Expected growth rate in sales, %

 

           

 

2017

10%

           

 

Decreases 1% each year after 2017

1%

           

3

Earnings Before Interest and Taxes (EBIT)

 

           

 

(% of Sales)

41%

           

4

Increases in Net Working Capital

 

           

 

(% of change in Sales)

-340%

           

5

Net Investment (CAPEX in excess of Depreciation)

 

           

 

(% of change in Sales)

-34%

           

6

Cash ($ Millions)

596

           

7

Debt ($ Millions)

1876

           

8

Corporate Tax Rate

17%

           

9

Weighted Average Cost of Capital (Rwacc)

25%

           

10

Number of shares outstanding (Millions)

543

           
                 
                 

FCF FORECAST ($ MILLIONS)

             

 

 

2016

2017

2018

2019

2020

2021

2022

 

 

 

 

 

 

 

 

 

1

Sales (Revenues)

5010,0

5520,3

6027,4

6520,7

6989,3

7421,6

7806,5

2

Growth versus Prior Year

 

10%

9%

8%

7%

6%

5%

3

EBIT                      

 

2274,2

2483,1

2686,4

2879,4

3057,5

3216,1

4

Less: Income Tax   

 

-393,4

-429,6

-464,7

-498,1

-529,0

-556,4

5

Less: Net Investment

 

172,7

171,6

167,0

158,6

146,3

130,2

6

Less: Inc. in NWC   

 

1734,7

1723,7

1677,2

1592,8

1469,7

1308,3

 

 

 

 

 

 

 

 

 

7

Free Cash Flow                                      (A)

 

3788,2

3948,9

4065,8

4132,6

4144,5

4098,2

8

Terminal Value, TV(2022)                   (B)

 

 

 

 

 

 

21755,5

 

 

 

 

 

 

 

 

 

9

Enterprise Value = PV(A) + PV(B), 2016

$17 467,7

 

 

 

 

 

 

10

Value of NVDA’s Stock, 2016

$29,81

 

 

 

 

 

 

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On the last trading date in January 2016, the closing stock price of NVidia Corporation was $29.29. Thus, the stock was not under- or overvalued at that time. Today, the stock is traded at $91.88 that is three times as high and the stock might be overvalued by the market. However, one should remind that the reported quarterly financial results for three quarters of financial year 2017 are outstanding compared to the previous year, and the stock price should reflect this fact. Besides, the increase in the share price reflected recent buyouts of the company’s stocks providing the remaining shareholders with higher dividends and capital gains.

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Conclusion

To conclude, NVidia Corporation is a very attractive company for investors and customers. It continuously invests into research and development providing the market with new valuable products and increasing its financial performance from year to year. The current year was exceptionally profitable for the corporation that generated only within first three quarters net income twice as high as for the whole previous financial year and enjoyed rocketed share price and market capitalization.

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