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The future of technology looks bright. 

Artificial intelligence, the metaverse, autonomous driving, and quantum computing—are all set to change the world around us. 

And one chip-maker has its hands on all of it – Nvidia (NVDA). 

The company is always in one of the top two spots for semiconductor searches amongst financial pros and retail investors.

Yet, it always felt overvalued to us.

With so many analysts following the stock and stratospheric price-to-earnings ratios, we thought the top search result might have been too obvious.

But with shares down nearly 50% year to date, is now the time to buy shares of Nvidia (NVDA)?

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Nvidia’s Business

Nvidia (NVDA) provides graphics, computing, and networking solutions across the globe. 

Most of us are familiar with the company’s graphics cards. The graphics segment offers GeForce GPUs for gaming, and PCs. GeForce Now is a cloud gaming service, which hosts 11 million members and is available in 70 countries. 

Nvidia’s Data Center business, geared towards large data center clients, did $3.8 billion in revenues during its last quarter. Its superchips are used by many of the top computer makers in the world. Plus the data center is used by companies for AI, cloud computing, and quantum research. 

NVDA accelerates more than 700 applications, including the top 15 in scientific computing. 

Furthermore, its technology is used in the auto-industry. NVIDIA DRIVE is aj end-to-end platform for automakers aimed at bringing autonomous vehicles to life. Some of its clients include Audi, Mercedes-Benz, Volvo, Nio, Navistar, and Hyundai.

The firm’s work in AI and computer graphics touches industries vauled at more than $100 trillion.  

NVIDA 

Financials

Nvidia fell into obscurity after the PC boom of the ‘90s. It wasn’t until the past decade that things took a huge turn.

From 2015 to 2021, the company increased its revenues by 5X. Its 12-month trailing revenues are at $29.54 billion. 

However, quarterly revenue in 2Q FY23 only improved by 3% from a year ago to $6.7 billion. The firm blames supply chain issues and the economy for its slowdown. But the future does look bright, thanks to accelerated computing and AI. Its data center revenue reached $3.8 billion last quarter, marking an improvement of 61% from a year ago. 

Despite the massive haircut NVDA shares have received this year, down -46% YTD, the company is not in a bad financial situation. That is evidenced by its $0.16 annual dividend and share repurchase program. Last quarter the firm bought $3.44 billion worth of its stock. 

NVDA has a current ratio of 5.3x, which means it has plenty of cash to handle its short-term liabilities.

Valuation

High P/E multiple tech stocks have gotten battered in 2022, and NVDA has been no different. 

The company has a P/E GAAP (ttm) of 53x, which is lower than its 5-year average of 58x, but not as low as its competitors. 

For example, Taiwan Semiconductor (TSM) has a P/E GAAP of 17x, Advanced Micro Devices (AMD) stands at 40x, Qualcomm (QCOM) is at 12x, and Broadcom (AVGO) is at 25x.

NVDA has a price-to-sales ratio of 13.6x, which is below its 5-year average of 16.8x, but still notably higher than its competitors. 

For instance, TSM has a price-to-sales ratio of 6.9x, AVGO is at 7.1x, AMD is 5.7x, and QCOM is at 3.6x. 

However, one could argue that NVDA should be trading at a premium because of its outstanding technology, but its stock has gotten punished this year. 

Profitability

At a gross profit margin of 60.5%, NVDA bests TSM at 54.9%, QCOM at 57.9%, and AMD at 50.7%. But trails AVGO at 74.8%. 

It just goes to show how profitable the semiconductor industry is. 

Additionally, NVDA has an EBITDA margin of 35.9%, which is better than AMD at 26.1% but not as strong as TSM at 67.9% orAVGO at 56.2%, and QCOM at 39.8%. 

With a return of equity of 34.4%, NVDA is right in line with its competitors, but trails QCOM significantly at 106%. 

NVDA is a money printing machine, generating over $7.5 billion in cash from its operations. 

Growth

Despite its massive size, NVDA continues to find pockets of growth. At 35.8% revenue growth (YoY), it bests all of its competitors except for AMD at 61.7%. It’s worth noting, NVDA did guide lower for Q3, $5.7 billion to $6.2 billion vs. $6.9 billion from the street. 

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Our Opinion 6/10

NVDA is a great company with a bright future. 

However, it trades at a high valuation. And because of that, shares could remain under pressure throughout the year. The firm did lower its guidance, as it expects the economy to stay challenging. 

We do like this stock as a long term investor, and would be buyers if it continues to decline.