What Does Nvidia’s Balance Sheet Say about Its Financial Health?

Nvidia (NVDA) is growing at a rapid pace, focusing on four key future growth trends of gaming, virtual reality, deep learning, and autonomous cars. Currently, it does not face much competition from companies other than Advanced Micro Devices (AMD), which was close to bankruptcy as it lost market share to Intel (INTC) and Nvidia.

Nvidia does not give much in dividends but spends more on buybacks. Shareholders mostly benefit from growth in its stock price, which has increased by 94% since the start of 2016. Let us look at the company’s balance sheet and understand whether it can withstand short-term headwinds and still give returns to shareholders.

Nvidia’s operating cash flow fell by 40.5% quarter-over-quarter to $184 million in fiscal 2Q17 as its accounts receivables increased. It spent $33 million on capital expenditure, which resulted in FCF (free cash flow) of $151 million. The company returned $71 million to shareholders—$62 million through dividend payments and $9 million through share buybacks.

However, if we look at fiscal 1H17, the company returned $633 million to its shareholders, which equals 156% of its FCF of $405 million. The company aims to return $1 billion to its shareholders in fiscal 2017.

In fiscal 2Q17, Nvidia’s accounts receivable rose by $121 million and accounts payable by $103 million. In the past six quarters, this was the first time receivables crossed $600 million and payables crossed $400 million.

Despite this, the company has sufficient working capital, as its receivables exceed its payables.

Nvidia’s inventory rose by $127 million during fiscal 2Q17 and now stands at $521 million as the company prepares for the holiday season. Even AMD and Intel increased their inventories in preparation for the holiday season.

On July 31, 2016, Nvidia’s cash reserves stood at $4.9 billion and its long-term debt was $502 million. The company is in a strong position to invest in long-term ventures or in acquisitions.

Next, we will see what the seasonally strong fiscal 3Q17 could bring for Nvidia’s investors.

You can get exposure in a financially strong Nvidia by investing in the VanEck Vectors Semiconductor ETF (SMH), which has holdings in 26 semiconductor stocks, including ~13.3% in INTC and ~5.2% in NVDA.