NVIDIA CORPORATION
Introduction and Company Background Information
NVIDIA Corporation is an American Company that was incorporated in 1988 and it’s headquartered in Santa Clara, California. The operations of the company focuses on Graphics Processing Unit ( GPU),PC graphics and artificial intelligence ( AI) and its services to the customers are provided through cloud architectures , mobile and PC (Bloomberg, 2018) . Its operations are done through Tegra Processor and GPU, which are based on a basic architecture. The processor from the company has resulted to various platforms addressing Automotive, Professional Visualization, Gaming and Data-center markets. The GPU products from the company have been created with a target on specialized markets such as designers’ GeForce, DGX and Tesla used by AI data scientists and researchers of big data and GRID for users of visual computing (Bloomberg, 2018).
The top competitors of the company include Intel, AMD, Samsung, Dell and NEC Global. In 2017, was ranked the smartest firm according to a review published by MIT Technology along a listing of other 50 smartest firms. The firm has been able to leverage its major capabilities in the field of visual computing to address various opportunities arising in the market. The firm has continued to be a leader especially in Artificial Intelligence Market with closet rival, Google TPU not presenting direct competition (Bloomberg, 2018). The firm is also working with various automotive partners in the development of a self-driving and robust ecosystem. Its target has been large automotive manufacturers such as Mercedes and Audi and also has an existing partnership established with Tesla. In addition, the company’s Drive PX2 is the most innovative and advanced GPU that allows deep learning and computation of complex data in autonomous driving field. It has been transforming the market for autonomous driving and GPU, and this is positioning the firm as a pioneer in this industry (Bloomberg, 2018). Though it faces stiff competition from firms such as Tesla, its innovative products have contributed to growth in revenue.
Income statement
The revenue for the firm was recognized in cases of an existing persuasive arrangement of sales arrangement, delivery of the product, fixed prices or there is a reasonable assurance of related receivable collection. The revenue for NVIDIA was $ 5.01 B for 2015 and $ 6.91 B for 2016 which shows that the company had a growth in revenue of $ 1.9, and indication of increase in sales. In 2016, the growth in sales was mostly experienced in its third quarter, where it surpassed estimates by analysts to grow with almost 54 percent year to year (NVIDIA Corporation, 2017). There was also acceleration in the gaming business that produced $ 1.244 B in revenue, an increase from $761M in the same period in 2014. The cost of sales for the firm was $2.2B in 2015 and $2.84 B in 2016, which shows an increase of the costs by $ 0.64 B. In 2017, the cost of sales was 41.2 percent of total revenue. The gross profit increased by 1.252 from $ 2.811 in 2015 to $ 4.063 in 2016 (NVIDIA Corporation, 2017).
The operating income in 2016 was $1.934 B and in 2015, it was $ 0.75 B, which indicates an increase of $1.187 B. The gross profit was 58.8 percent of the revenue in 2016. The net income increased from $ 0.614 B in 2015 to $ 1.666 B in 2016, which indicates an increase of $ 1.052 B for the two year period. The income tax expense recognized in 2016 was $ 239 M, whose calculation involved application of 35 percent as the prevailing rate of Federal Statutory Income tax (NVIDIA Corporation, 2017). The overall comprehensive income for 2016 was less than the net income by $ 12 Million, which made the net income to decrease in the period. The comprehensive income for the firm in 2016 consisted of net income and loss on other such income which includes Net Unrealized Gain, Net Realized Gain Reclassification Adjustments and Unrealized Gain Net Change. Others involve Cash-flow hedges like Net Unrealized Gain, Net Unrealized Gain and Unrealized Gain Net Change that were all losses. The overall comprehensive income was $ 1.654 by the end of 2016.
Revenue for the firm increased by 38 percent in 2016, and the gross margin expansion was by 58.8 percent representing 270 basis points. The gaming business for grew significantly in 2016 and racked in $ 4.1 billion and setting a record. The Artificial Intelligence was a major driver for growth of datacenter business, which had been tripling over the years and in the fourth quarter, its contribution to overall revenue was $ 830 million (NVIDIA Corporation, 2017). The automotive business of the firm accounted for 6 percent of total revenue, and appears to have experienced the first growth among the entire segments of the firm - the growth was 52 percent for year 2016 and 85 percent in 2015 (NVIDIA Corporation, 2017). NVIDIA is also making significant inroad into the market of data center, which is shown by 6 percent revenue contribution by data center for 2016 and 9 percent in 2015. However, some areas have show declining revenue indicating barrier to growth. Professional visualization, with 15 percent of NVIDIA revenue, had declining revenue due to slow expansion of workstation market. Tegra business also appears to be declining as demand for tablets and smartphones reduces (NVIDIA Corporation, 2017).
Balance Sheet
The total current assets in 2016 were $ 8.536 B and $ 6.053 B in 2015. The long-term assets were $1.305 B in 2016 and $1317 B in 2015. The current liabilities were $1.788 B and $ 2.351 B in 2016 and 2015 respectively. The long term-liabilities were $2.260 B and $ 0. 463 Billion in 2016 and 2015 respectively. The Work Capital for NVIDIA which is the distinction between the overall short-term assets and Current liabilities were $ 2.483 Billion (NVIDIA Corporation, 2017). The working capital of a firm indicates its efficiency or its financial health since it serves as a sign of NVIDIA ability to cater for the current liabilities. The total equity for NVIDIA’s shareholders comprised of $ 5.762 Billion and $ 4.469 Billion in 2016 and 2015 respectively. The company held Treasury stocks of $5.039 Billion in 2016 and $4.469 B in 2015. The firm’s balance sheet considered all the investments that were highly liquid and that could readily be converted into cash and be able to originally mature after 3 months or less during purchase as being cash equivalents (NVIDIA Corporation, 2017). As per 2016 and 2015 financial year end, the firm’s cash and equivalents amounted to $ 1.77B and $ 596 M respectively. This also comprised the $ 321 M and $ 43M whose investments were done in funds for money market. The firm also maintained a doubtful account receivable’s allowance, for any estimated loss that would result from customer inability to make their pay (NVIDIA Corporation, 2017).
Cash flow statements
Cash flow statements indicates how the various changes in income and balance sheet affect’s a company’s cash or cash equivalents and the analysis is broken down into investing , operating and financing activities. NVIDIA net cash flow was $ 1.672 billion and $ 1.175 billion in 2016 and 2015 respectively. This indicates an increase in net cash flow of over the two year period by $ 0.497 billion. The depreciation and amortization was $ 0.187 billion and $0.197 in 2016 and 2015 respectively. The total of deferred income taxes in was $ 0.197 billion and $ 0.134 billion in 2016 and 2015 respectively (NVIDIA Corporation, 2017). There was also debt discount amortization of $ 0.025 billion and $ 0.029 billion in 2016 ND 2015 respectively. The net cash flow also comprised of adjustments of $0.011 billion and 0.019 billion in 2016 and 2015 respectively. The NVIDIA net investing activities’ cash flows were $ 0.793 billion and $ 0.4 billion in 2016 and 2017 respectively (NVIDIA Corporation, 2017). The major investing activities that made up these cash flows includes marketable securities’ sales that stood at $ 1.546 billion and $ 2.012 billion for 2016 and 2015 respectively, marketable securities proceeds of $ 0.969 billion and $ 1.036 billion in 2016 and 2015 respectively, long-term investments and assets sale of $ 0.007 billion and $ 0.007 billion in 2016 and 2015 respectively (NVIDIA Corporation, 2017). In the two year period, the firm purchased marketable securities at $ 3.134 billion and $ 3.477 billion in 2016 and 2015 respectively, and intangible assets, property and equipments of $0.176 billion and $ 0.086 billion in 2016 and 2015 respectively (NVIDIA Corporation, 2017). All these comprises of the investing activities undertaken by the firm in the 2 year period.
The net cash resulting from operating activities was $ 0.291 and $ - 0.677 billion in 2016 and 2015 respectively. The operating activities in this period include notes’ issuance at $1.988 billion in 2016, common stock repurchases at $ 0.739 billion and $0.587 billion in 2016 and 2017 respectively, convertible notes’ repayment at $ 0.673, payment of dividends at $ 0.261 and $ 0.213 in 2016 and 2015 respectively, a payment of $ 0.009 billion for employee stock plan in 2016, and proceeds of $ 0.12 billion from similar plans in 2015. In addition these, debt issuance costs payments, stock-compensation tax benefit and other minor financing activities formed a part of these cash flows (NVIDIA Corporation, 2017). The was change of $ 1.17 billion in cash over the two year period indicating increase from 2015 to 2016 of all the cash equivalents and cash. The items in net income include sales and interest incomes, gains from marketable securities’ sales, investment sales from which general and administrative expenses, restructuring charges, marketable security losses and investment impairments. The items in operating activities’ total net less working capital changes and non-cash expenses. There is a cash flow gotten from operating activities of the company which is a net of $ 291,000,000 for 2016 but a negative net cash flow of $ 676,000,000 for 2015 (NVIDIA Corporation, 2017). The company sold long-lived assets and investments at $7,000,000 for both in 2017 and 2016 financial year. The company also bought property and equipment, intangible assets at $176,000,000 and $ 86,000 000 for 2017 and 2016 financial years respectively. Long-lived assets are the assets that have, for a long period of time, been providing economic benefits to a company. Long-term investments are those that have taken long to be disposed. The long terms assets were tangible while the long-term investments were intangible. The major financing activity that increased cash for this company was the notes issuance in 2017 which increased cash to, $1,988, 000,000 (NVIDIA Corporation, 2017). Note issuances is a facility that involves underwriting arrangement found in Eurocurrency market where short-terms notes are placed through banks and is backed by bank’s commitment to any note that the borrower will not be able to sell.
Ratio analysis
Current ratio - current assets / current liabilities
|
|
2016 |
2015 |
|
Current ratio |
8,536 / 1788 |
6053/ 2351 |
|
|
4.8 |
2.6 |
This current ratio indicates that NVIDIA’s assets were greater than its liabilities, which means that the firm was able to honor its obligations whenever they would come due at that time. The liquidity of the company improved from 2015 to 2016, as indicated in the increased current assets to current liabilities ratio.
Operating margin
= 14 .91 for 2015 and 27.99 for 2016 (Morningstar, Inc, 2018)
Operating margin indicates how much a firm makes on the sales, before taxes and interests are considered with a high margin showing a good performance. The operating margin indicates a good performance of NVIDIA, which improved from 2015 to 2016.
Return on assets
= Net Income / {(Beginning + ending total assets)/2}
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|
2016 |
2015 |
||
|
R.O.A |
1666/ {(7,201 +7,370)/2} =
|
614 /{(7,251 +7201) /2} |
||
|
|
|
9.46 |
Return on Assets indicates the profitability of a firm in relation to the total assets, in terms of efficiency of the firm in managing assets in generation of earnings. The NVIDIA ratios indicate that the firm was efficient in converting its financial resources into net income and this efficiency improved from 2015 to 2016.
Return on investments
= 9.46 for 2015, 23.12 for 2016 (Morningstar, Inc, 2018)
This ratio measures efficiency of a firm in terms of Return on Investment in relation to cost used in investment. The efficiency of the firm in 2016 was better than in 2016 in terms of returns on the cost used in investment activities of NVIDIA.
Horizontal Analysis
|
NVIDIA Corporation; NASDAQ: NVDA (SEC 10-k, pg. 48) |
||
|
2017 |
2016 |
|
|
Cost of Goods Sold (COGS) |
$2,847 |
$2,199 |
|
Net Sales |
$6,910 |
$5,010 |
|
Net Income |
$1,666 |
$614 |
|
Gross Profit (Sales – COGS) |
$4,063 |
$2,811 |
|
Net income per share |
$3.08 |
$1.13 |
The large difference in the net income between 2015 and 2016 can be attributed to higher costs of goods sold in 2015 in proportion to the cost of sale in 2016. The difference can also be noted in the net income per share between the two years.
NVIDIA Corporation balance sheet NVDA (SEC 10-k, pg. 50)
|
|
2017 ( millions ) |
2016 (millions) |
|
Cash and cash equivalents |
$ 1766 |
$ 596 |
|
Accounts receivables |
$ 826 |
$ 508 |
|
Inventories |
$ 794 |
$ 418 |
|
Operating current assets |
$ 3386 |
$ 1522 |
The firm had sufficient operating current assets to continue with its operations in the two year period. The increment in the operating current assets from $1522 in 2016 $ 3386 in 2017 shows increasing support for business operations
Vertical analysis
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Vertical Analysis |
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2017 |
2016 |
Percentage Change |
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|
Gross Profit Margin |
(sales - COGS) / sales |
58.80% |
56.11% |
(+) 2.69% |
|
Net Profit Margin |
net income / net sales |
24.11% |
12.26% |
(+) 11.85% |
The percentage change in net profit margin between 2017 and 2016 indicates an improved profitability if the firm and hence growth.
|
|
2017 |
2016 |
Change |
|
Operating current assets |
3386 |
1522 |
+ (1,864) |
|
Operating current liabilities |
1788 |
2351 |
-(563) |
The positive changes in operating current assets in 2016 shows sufficient net operating working capital and the negative change in 2017 shows insufficient net operating working capital.
Conclusion
NVIDIA analysis shows positive consolidated yearly earnings in 2016 and 2015 financial years, with a constant rise in profitability. With a net profit margin increment of 11.85 percent over a period of two years, the performance of the firm places it a good place in the market. The positive growth indicates that the firm is exploiting the various opportunities available to especially in artificial intelligence to expands its market and hence increase sales’ revenue. The increase in operating margin indicates the increased sales of the firm over the years, and the positive return on investment shows improved efficiency of the firm in translating its resources into profitability. Amidst increased competition, the firm is continuing to grow so quickly with no major incidences such as liquidity problems that can hold it back. The firm can be expected to sustain the growth trend in future.
References
NVIDIA Corporation, (2017). FORM 10-K. http://d18rn0p25nwr6d.cloudfront.net/CIK-0001045810/b59df85f-5018-4b85-a07a-57dc52782be5.pdf
Bloomberg, (2018).Company Overview of NVIDIA Corporation. Retrieved from: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=32307
Morningstar, Inc, (2018).NVIDIA Corp. Retrieved from: http://financials.morningstar.com/ratios/r.html?t=NVDA®ion=usa&culture=en-US
