Nvidia: Gaming Gains

11/02/2015 7:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

Unless you play a lot of video games, you probably pay little attention to your computer’s graphics card; to the gamer, however, the graphics card represents the heart of a computer system, explains Richard Moroney, editor of Dow Theory Forecasts.

Nvidia (NVDA) keeps those hearts pumping. Gaming accounted for about 45% of Nvidia’s sales in fiscal 2015 ended January.

PC Gamer magazine in July rated Nvidia’s GeoForce GTX 970 the best graphics card, calling it “the price/performance champion.”

Rather than pursue the hoi polloi, Nvidia prefers to focus on high-end gamers. We expect Nvidia to remain at the head of the charge with nascent technologies such as ultra-high definition and virtual reality.

While gaming remains Nvidia’s most important market, the company says visual computing is gaining importance market-wide, creating opportunities in cloud computing, enterprise graphics, and autonomous vehicles.

As of July, Nvidia worked with more than 3,300 companies on speech recognition, image analysis, and translation. It also collaborated with more than 50 companies on autonomous driving.

It also provided graphics virtualization products and services to 300-plus large corporations, more than triple the customer base from a year earlier.

Since early August, when Nvidia posted better-than-expected results for the July quarter and boosted its October-quarter guidance, the shares have jumped 34%.

Despite those gains, Nvidia trades at 20 times expected year-ahead earnings, comparable with the average for its semiconductor peers, few of which boast such well defined growth potential.

In the last ten quarters, Nvidia has spent more than $1.8 billion on share repurchases, reducing the share count 11%.

During the same period, the company raised its dividend twice, most recently a 15% hike in May; the stock yields 1.4%. Spending on buybacks is slowing, but we expect dividend growth to continue. The stock is a long-term buy.

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