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Does Nvidia Have Sufficient Cash to Fund Its Technology Roadmap?

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Nvidia is financially strong

In the previous part of this series, we saw that Nvidia (NVDA) is actively developing products for the fast-growing markets and is also accelerating the launch of Volta, its next-generation GPU (graphics processing unit). All this requires large capital investments and with the company’s strong profits and balance sheet, cash is not a concern.

Let’s look at Nvidia’s cash flows and balance sheet as a way to understand its financial strengths and weaknesses.

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Cash flows

As seen from the above graph, Nvidia’s (NVDA) operating cash flows on average are between $150 million–$300 million on operating income that exceeds $300 million. For fiscal 3Q17, the company’s cash flows are likely to be near $300 million, as its operating margin would increase in dollar terms.

Capital expenditure

One important point to note here is the high capital expenditure of $55 million that Nvidia incurred in fiscal 1Q17. During that quarter, the company started production of its Pascal GPU, which required a high capital investment. The company’s capital expenditure was high in fiscal 2Q17 and is expected to remain high in fiscal 3Q17.

For fiscal 3Q17, Nvidia (NVDA) expects to use $35 million–$45 million in capital expenditure. This may increase in fiscal 1Q18 as the company plans to launch its next-generation Volta GPU in fiscal 2Q18.

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Cash and debt position

On July 31, 2016, Nvidia’s cash reserves stood at $4.9 billion, and its long-term debt stood at $502 million. The company is in a strong position to invest in long-term ventures or acquisitions. Nvidia’s net cash position of $4.4 billion is stronger that rival Advanced Micro Devices (AMD), which has a net debt position of ~$400 million.

Nvidia’s competition

Nvidia’s capital is focused on GPU technology, whereas AMD’s capital is distributed in segments such as PC and server processors, GPUs, and semi-custom SoCs (system-on-chips). This puts Nvidia in a better position than AMD to develop new technology.

On the other hand, tech giant Intel (INTC) has strong cash reserves of $15 billion and a dominant market share. However, it is behind Nvidia in terms of technology. As developing technology in-house is time-consuming, Intel is acquiring deep learning and AI (artificial intelligence) startups to compete with Nvidia’s technology.

Despite the competition, Nvidia is growing quickly, which is reflected in its earnings as well as in its stock price. In the final part of this series, we’ll look at the company’s stock performance in fiscal 3Q17.

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