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The Secret behind NVIDIA’s Strong Cash Flows

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NVIDIA’s balance sheet

In this series, we’ve seen that NVIDIA (NVDA) is expanding its research and development efforts to bring its GPUs (graphics processing unit) and Tegra processors into various applications, ranging from home automation to automotive to gaming to embedded applications.

Despite these expenses, the company has a strong balance sheet, as its product development has yielded strong earnings.

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Cash flows

NVIDIA’s operating cash flow rose 42% YoY (year-over-year) to $1.7 billion on operating income of $2.2 billion in fiscal 2017. Its operating cash flow rose faster than Intel’s (INTC), which rose 14.7% YoY during the same year. On the other hand, rival Advanced Micro Devices (AMD) moved from a negative operating cash flow of $226 million in fiscal 2015 to a positive cash flow of $90 million in fiscal 2016.

NVIDIA’s operating cash flow rose 84.5% from $906 million in fiscal 2015 to $1.7 billion in fiscal 2017. This growth largely came as NVIDIA increased its share in the high-end GPU market and the high-margin data center market, significantly expanding its operating margins.

Shareholder returns 

As NVIDIA’s cash flows improved, it increased its shareholder returns from $800 million in fiscal 2016 to $1 billion in fiscal 2017. The company plans to return $1.3 billion to its shareholders in fiscal 2018.

On the other hand, AMD has been struggling to make ends meet, because of which it hasn’t provided any returns to shareholders for more than five years. Intel reduced its shareholder returns from $8 billion in fiscal 2015 to $7.5 billion in fiscal 2016. The company likely reduced these returns further in fiscal 2017 as it reinvested in its business to fund acquisitions.

Leverage on balance sheet

At the end of January 2017, NVIDIA had a net cash position of $4.8 billion, whereas Intel and AMD had net debt positions of $8.2 billion and $170 million, respectively. Most semiconductor companies have highly leveraged balance sheets, as several major acquisitions took place in 2015 and 2016.

NVIDIA is among the few semiconductor companies that hasn’t made any major acquisitions. This has left it with $6.8 billion in cash reserves and $2.0 billion in debt. The company’s strong financial position is an outcome of better product positioning and premium pricing.

The company’s cash reserves are likely to rise further in fiscal 2018. NVIDIA hasn’t revealed any plans for acquisitions so far. At its 2017 Investor Day on May 10, 2017, NVIDIA will unveil its long-term growth plans.

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