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Nvidia Corporation Quarterly Valuation – May 2015 $NVDA

197px-Nvidia_logo.svgNvidia Corporation (NVDA) has had a bad week in terms of market price, as the company’s stock dropped 7% since May 7. Recently, analysts have focused on the company’s efforts in the 4G field and competition. These are all things to consider before investing in the company and are considerations that may attract investors.

That said, Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to determine a potential investment’s merits. Here’s an updated look at how Nvidia Corporation fares in the ModernGraham valuation model.

This model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another. By using the ModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.

NVDA Chart

NVDA data by YCharts

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Defensive Investor – Must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – Market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – Current ratio greater than 2 – PASS
  3. Earnings Stability – Positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – Has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – Earnings per share has increased by at least one-third over the last 10 years, using three-year averages at the beginning and end of the period – FAIL
  6. Moderate PEmg (price over normalized earnings) ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – Must pass at least 4 of the following 5 tests, or be suitable for a Defensive Investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – Current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt-to-Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – Positive earnings per share for at least 5 years – PASS
  4. Dividend Record – Currently pays a dividend – PASS
  5. Earnings Growth – EPSmg greater than that 5 years ago – PASS

Valuation Summary

Key Data

Recent Price $20.95
MG Value $21.85
MG Opinion Fairly Valued
Value Based on 3% Growth $11.49
Value Based on 0% Growth $6.74
Market Implied Growth Rate 8.96%
Net Current Asset Value (NCAV) $5.45
PEmg 26.43
Current Ratio 6.60
PB Ratio 2.61

Balance Sheet – April 2015

Current Assets $5,832,000,000
Current Liabilities $883,000,000
Total Debt $1,404,000,000
Total Assets $7,291,000,000
Intangible Assets $823,000,000
Total Liabilities $2,735,000,000
Outstanding Shares 568,000,000

Earnings Per Share

2016 (estimate) $0.49
2015 $1.12
2014 $0.74
2013 $0.90
2012 $0.94
2011 $0.43
2010 -$0.12
2009 -$0.05
2008 $1.31
2007 $0.77
2006 $0.55

Earnings Per Share – ModernGraham

2016 (estimate) $0.79
2015 $0.90
2014 $0.72
2013 $0.62
2012 $0.48
2011 $0.33

Dividend History

NVDA Dividend Chart

NVDA Dividend data by YCharts

Conclusion

Nvidia should satisfy the Enterprising Investor but not the Defensive Investor. The Defensive Investor has multiple concerns, including the short dividend history, the insufficient earnings stability or growth over the last ten years, and the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. Therefore, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $0.48 in 2012 to an estimated $0.79 for 2016. This level of demonstrated growth is in line with the market’s implied estimate for earnings growth of 8.96% over the next 7-10 years.

The company’s recent earnings history shows an average annual growth in EPSmg of nearly 13%. The ModernGraham valuation model reduces such a rate to a more conservative figure, assuming some slowdown will occur, but still returns an estimate of intrinsic value falling within a margin of safety relative to the current price, indicating Nvidia is fairly valued at the present time.

Disclaimer: The author did not hold a position in any of the companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logos taken from either the company website or Wikipedia; this article is not affiliated with the companies in any manner.

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