Pandemic carries Nvidia to record profits

A global shortage of all types of microchips will likely continue as the pandemic creates bottlenecks for supply while also creating higher demand.

That means opportunities for investors in the companies that design and make semiconductors. They are reporting a record year with strong sales and profits. One company that stands to gain from these trends in Nvidia Inc.

Nvidia (NDQ: NVDA) is best known for the graphic processor units used in gaming systems, which makes them more lifelike and helps them run faster. It is also a leader in artificial intelligence (AI) and cloud-based computing.

It makes the central processing units (CPUs) that provide the brains for autonomous robots, self-driving cars, and drones as well as power cloud-based computing software. A growing area is the processors used by crypto-currency miners. The mining adds transactions to a blockchain and is part of a process that allows everyone to trust the transaction.

Nvidia has benefitted from pandemic lockdowns which have created strong demand for such things as gaming systems. As businesses have moved to cloud-computing and more employees work from home it has fueled sales of data centre chips. A pending takeover of British chipmaker ARM is creating more opportunity.

Here’s a snapshot: (All figures in U.S. dollars)

Performance: Nvidia’s shares are up 91.4% in the last 12 months and 24.4% year-to-date. As a result, they carry a high forward price to earnings ratio of 40.1.  

Recent developments: To maintain that lofty multiple, investors were expecting big things when Nvidia reported its first quarter 2022 results last week. They got them, with strong demand in all segments.

Revenue of $5.6 billion was 84% higher year-over year. Net income of $1.91 billion, or $3.03 per share, was 106% higher. The processors it sells specifically for cryptocurrency miners had sales of $155 million. The outlook is equally strong.

Discussion & Outlook: Nvidia sees its $40 billion acquisition of ARM, a British chip designer, as key to its next level of growth. Regulators are examining the deal, but in a conference call executive vice president Colette Kress said Nvidia is confident it will be concluded by 2022.

The takeover would enhance the prospects of both companies.  ARM’s chips are in 90% of smartphones, which means most of us use an ARM product. The deal gives ARM customers access to Nvidia’s artificial intelligence and graphics processor intellectual property. Nvidia gets a new product line and the licensing and royalty fees that ARM receives from the world’s biggest tech companies.

Dividend and buybacks: The company last raised its dividend two years ago. The $0.64 annual payment yields 0.001% at current  prices. Nvidia plans a 4-for-1 stock split in July, its first in 14 years.

This is an edited version of article that appeared in the Internet Wealth Builder on May 31, 2021.