… hold NVIDIA Corporation (NASDAQ:NVDA) …
Tigress grabs an even feistier feline by the tail with its analysis of graphics chip specialist NVIDIA Corporation (NASDAQ:NVDA). On one hand, the analyst calls NVIDIA Corporation (NASDAQ:NVDA)’s valuation of less than 14 times earnings, and less than 12 times free cash flow, “compelling.” (So far, so good). On the other hand, though, Tigress trashes the stock’s prospects by arguing that “performance drivers remain flat” and says it sees “little upside potential” in the stock.
I couldn’t disagree more.
Missing from Tigress’ analysis are several things that argue strongly in favor of giving NVIDIA a “buy” rating. For one thing, growth estimates of 10.6% and a strong dividend yield of 2.4% combine to give this stock a total return ratio of 13% — which should easily justify the company’s FCF valuation of 12. Plus, NVIDIA Corporation (NASDAQ:NVDA) boasts a balance sheet plump with $3.7 billion in cash, and negligible debt. Factor cash into the equation, and NVIDIA has an enterprise value only 6.4 times annual free cash flow. On 10%-plus growth and paying a 2.4% divvy, NVIDIA Corporation (NASDAQ:NVDA)’s a real steal of a deal.
… and buy QUALCOMM, Inc. (NASDAQ:QCOM)?
Tigress reserves its strongest endorsement — a “strong buy” rating — for shares of QUALCOMM, Inc. (NASDAQ:QCOM), where the analyst sees accelerating “performance drivers” turbocharging “growing demand for 4G/LTE enabled smartphones and tablets” to produce “significant upside to the shares.”
To an extent, Tigress is right about that. Net profit margins at the company are on the rise again, after slumping to below 28% in 2012. However, underlying the strong net margins growth is continued weakness in gross and operating margins, weak free cash flow ($5.1 billion versus $6.6 billion in claimed “net income”), and a 17 P/E ratio that looks only modestly attractive relative to long-term earnings growth expectations of less than 15%.
True, QUALCOMM, Inc. (NASDAQ:QCOM)’s 1.5% dividend helps to make up for the gap between growth and P/E. On the other hand, though, the company’s weak free cash flow means that this stock actually costs closer to 22 times free cash flow (or 19 times FCF) when its cash-flush bank account is factored in). Either way, when valued on free cash, QUALCOMM, Inc. (NASDAQ:QCOM) looks more expensive than its more modest P/E ratio makes it appear. While I suspect the stock’s worth holding onto at these prices, I’d be leery of buying more until QUALCOMM, Inc. (NASDAQ:QCOM) shows signs of getting its cash engine revving higher.
Bonus idea: Micron Technology, Inc. (NASDAQ:MU)
That’s it for Tigress’ recommendations, but before we close out today’s column, let’s look at one last semi stock that was recently downgraded: Micron Technology, Inc. (NASDAQ:MU).
Susquehanna cut Micron to “negative” yesterday, and I think the analyst is calling this one right. Unprofitable and selling for 15 times next year’s earnings, Micron looks overpriced. If it’s true that the stock is generating positive free cash flow again, its current tally of $510 million in trailing-12-month FCF still only gets the stock up to about 18 times FCF. Taking analyst estimates at face value, that’s still too high a price to pay for 14% projected long-term profits growth.
With no dividend to recommend it (Micron is the only semi-stock on today’s list that doesn’t pay a dividend), it’s hard to justify Micron’s valuation at today’s prices.
Long story short, out of all the stocks mentioned so far, I think NVIDIA is the best bet available, followed by Qualcomm; TI, maybe; and Micron, no way.
The article This Just In: Upgrades and Downgrades originally appeared on Fool.com.
Fool contributor Rich Smithowns shares of NVIDIA. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he’s currently ranked No. 327 out of more than 180,000 members.The Motley Fool recommends NVIDIA and owns shares of Qualcomm.
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