NVIDIA Corporation (NVDA)’s Stock Is Still Deeply Undervalued

Pile of cash

Cash, cash equivalents, and investments grew to $3.73 billion, up 8.5% from the prior quarter and 19.1% year-on-year. NVIDIA has no debt and 622 million diluted shares outstanding, leaving $6 in net cash per share. This cash represents about 49% of the total market capitalization.

NVIDIA first started paying a dividend at the end of 2012, paying $0.075 quarterly for a yield of 2.44%. In addition, NVIDIA has about $1.1 billion authorized for share buybacks which expires at the end of 2014. The company hasn’t bought back shares since 2008, leading to share dilution from employee stock options. Hopefully share buybacks can reverse this trend.

Is NVIDIA Cheap?

NVIDIA stock currently trades around $12.30 per share, having stayed largely flat for the past year. Subtracting out the net cash position the market is valuing NVIDIA’s future profits at just $6.30 per share. The company recorded $640 million in free cash flow in fiscal 2013, down from $770 million in the year before. As the Tegra business grows I expect the increased investments to pay off and this cash flow trend to reverse. FCF/share is $1.03 per share, meaning that the adjusted P/FCF ratio (after subtracting out the cash) is just 6.1.

Even without organic growth share buybacks can increase the per-share profits at a rate which makes this ratio seem extremely low. I’ll do a simple discounted cash flow calculation to estimate the fair value of a share of NVIDIA. I’ll use a discount rate of both 12% and 15% to define a fair value range, and I’ll perform this calculation for three different scenarios:

  • No-growth – FCF remains constant.
  • Slow-growth – FCF grows by 3% annually.
  • Faster-growth – FCF grows by 6% annually for the next 10 years and by 3% perpetually after that.

The results of these calculations are shown in the table below.

Scenario Low-end High-end
No-growth $12.87 $14.58
Slow-growth $14.84 $17.79
Faster-growth $16.67 $20.50

Even under a no-growth scenario NVIDIA is undervalued. Realistically, I think the stock is worth somewhere between $16 – $20 per share.

The Bottom Line

NVIDIA invented the graphics processor, and after refocusing on mobile products the company is now in a position to see substantial growth going forward. Given its huge cash position and the apparent pessimism the market seems to be directing at NVIDIA, it looks like a great time to open a position in this stock. The prospect of a dividend boost and substantial share buybacks only sweeten the deal.

The article This Stock Is Still Deeply Undervalued originally appeared on Fool.com and is written by Timothy Green.

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