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NVIDIA - sales surge sees profits rise

Nicholas Hyett, Equity Analyst | 4 June 2020 | A A A
NVIDIA - sales surge sees profits rise

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NVIDIA Corp USD0.001

Sell: 207.18 | Buy: 207.24 | Change -9.38 (-4.33%)
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NVIDIA announced first quarter results on 21 May 2020. Revenues rose 38.7% year-on-year to $3.1bn. That reflects a particularly strong performance in the Data Centre business, with growth good growth in gaming. A record level of gross margin together with tight operating cost control meant underlying net income rose 106.3% to $1.1bn.

NVIDIA remains committed to paying its quarterly dividend, although the resumption of the share buyback programme will depend on market conditions.

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Our view

NVIDIA has been at the forefront of gaming and graphics technology since its formation in 1993.

Gaming still accounts for around half of sales, leaving NVIDIA well placed to capitalise on the growing gaming industry. But the power of NVIDIA's chips mean they're increasingly in demand outside the world of consoles and joysticks.

The 'Professional Visualisation' division supports digital design and engineering work in architecture, oil & gas and medical imaging. The group's DRIVE platform gives it a stake in the potentially exciting self-driving car market, with a product that can "perceive and understand in real-time what's happening around the vehicle...and plan a safe path forward".

However it's the Data Centres business which is really flourishing. As well as powering some of the world's most powerful supercomputers NVIDIA produces cutting edge hardware for training artificial intelligence (AI) software. While this is a competitive space, the opportunity is significant and recent sales numbers suggest NVIDIA's products are proving popular with customers. A pipeline of new and recently launched products should unpin growth for some time to come and the coronavirus outbreak could well accelerate existing trends.

If growing end markets is one attraction, the group's neat business model is another.

The group outsources all of its manufacturing, and without the costs, capital and risk associated with owning manufacturing facilities NVIDIA's delivered impressive gross margins. This helps fund M&A, like the $6.9bn acquisition of Mellanox, which should boost data centre architecture for high performance computing and AI.

High gross margins help fund the research & development budget, which stood at $2.8bn last year. Recent innovations have included real time ray tracing, which could revolutionise gaming graphics with ultra-realistic imagery.

With net cash on the balance sheet and hefty operating cash flows, it's difficult to see NVIDIA as anything other than a very high quality business. Unusually for a US tech company, the group's willing to return surplus cash to shareholders, mostly through share buybacks, although these are on hold until the Mellanox acquisition's done and dusted. There's currently a 0.2% prospective dividend yield on offer too.

Overall it's hard not to be impressed by a business at the cutting edge of some pioneering industries. But keep in mind all those strengths come at a price - the shares change hands for 40.5 times expected earnings, well above the ten year average.

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First Quarter Results

Gaming revenues rose 27% year-on-year to $1.3bn. That follows the launch of over a hundred of new laptop models featuring NVIDIA chips as well as new ray tracing technologies.

Revenues from Data Centres rose 80% year-on-year, benefitting from the launch of the new Ampere chips. The divisions continues to launch a wide range of cloud computing and AI focused products. The group completed the $7bn acquisition of Mellanox after the period end, further strengthening this division.

Professional Visualisation revenues rose 15% year-on-year to $307m, while Automotive sales fell 7% to $155m.

Net cash rose 5.5% to $9.4bn reflecting $754m of free cash flow.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.