At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
The future is mobile
For as long as I can remember, NVIDIA (NAS: NVDA) has been synonymous with quality PC graphics. Sure, rival ATI did good work. That's why Advanced Micro Devices (NYS: AMD) bought it. And yes, Intel (NAS: INTC) is making progress in graphics with Sandy Bridge. But NVIDIA always seemed to garner the most praise from that most demanding audience for PC tech -- video gamers.
This week, NVIDIA is winning even more praise -- but for different reasons, and from a different audience: Wall Street analysts -- specifically, the tech trackers at Wedbush Morgan, which yesterday initiated coverage of NVIDIA with a "buy" recommendation. According to Wedbush, you see, NVIDIA is beginning to move out of its comfort zone in the PC world and is now in the early innings of transforming into a mobile-computing leader as well.
NVIDIA's already a favorite processor in flagship smartphones pushed by telecom providers AT&T (NYSE T) and Verizon (NYS: VZ) , and the Android-based smartphone makers that build the phones themselves -- including Motorola Mobility (NYS: MMI) and LG. Wedbush says NVIDIA's new "Tegra 3" processor has "momentum" in tablets and smartphones alike. Additional momentum seems to be building, too, on the company's income statement, where Wedbush sees NVIDIA grossing more than half of each revenue dollar in profits in fiscal 2012 and earning a 16.7% operating margin. According to the analyst, NVIDIA's on pace to earn as much as $0.95 per share in fiscal 2012 and then grow that figure to $1.09 per share in fiscal 2013. Best of all, these numbers could be conservative. In predicting $1.09 for 2013, for example, Wedbush is assuming that NVIDIA books only $4.4 billion in sales that year -- whereas NVIDIA itself is already guiding investors to expect $4.7 billion to $5 billion.
All of which adds up to a great reason to buy NVIDIA today, in Wedbush's opinion. But how much is that opinion worth?
Let's go to the tape
Historically, Wedbush's semiconductor recommendations have been somewhat hit-or-miss, but in recent years the analyst has been on a definite winning streak. Today, 65% of its active recommendations in the industry are beating the market, including such winners as:
Wedbush's Picks Beating S&P by
Cypress Semiconductor (NAS: CY)
So it seems Wedbush does know a thing or two about semiconductors -- and call me a crazy optimist, call me a Fool, but I think it's found another winner in NVIDIA. Why? Well just look at the numbers. NVIDIA currently sells for 16 times earnings, which looks reasonable in light of the company's projected 15% long-term growth rate.
But in fact, NVIDIA is even cheaper than that. For one thing, the company's 16 P/E doesn't take into account $2.6 billion in net cash on NVIDIA's balance sheet. For another, it probably understates the company's true profitability. Though reported income at NVIDIA amounted to only $543 million over the last 12 months, actual free cash flow at the business rang in nearly 50% higher -- $803 milllion.
Result: If you net out NVIDIA's cash stash and value it on free cash flow, the company's enterprise value-to-FCF ratio comes in at a drool-inducing 7.6. That's about half the level of the company's projected growth rate, and to my Foolish eye, that makes NVIDIA a screaming buy.
Nor am I the only investor finding NVIDIA too cheap to resist today. After rising 2.2% on yesterday's upgrade, NVIDIA shares are up another 4.5% today as the news continues to filter out. Will they continue to climb in the months and quarters to come? Add NVIDIA to your watchlist and find out.
At the time thisarticle was published Fool contributorRich Smithowns shares of no company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 395 out of more than 180,000 members. The Fool owns shares of and has bought calls on Intel.Motley Fool newsletter serviceshave recommended buying shares of NVIDIA, Intel, Cypress Semiconductor, and AT&T, creating a diagonal call position in Intel, and writing puts in NVIDIA.We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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