2 Ways NVIDIA Is Staying Ahead of the Competition

By John Ballard Markets Fool.com

NVIDIA's (NASDAQ: NVDA) stock has risen 650% in the last five years as it has broadened its graphics technology to a number of areas beyond gaming. It's important for investors interested in the company to know what the graphics specialist is doing to stay ahead of the competition and continue delivering returns for shareholders.

Continue Reading Below

Partnerships and design wins

NVIDIA's business outside of selling graphics processing units (GPUs) to PC gamers is heavily dependent on winning a place inside other company's systems, so-called design wins. Gamers can buy NVIDIA's GPUs direct from the company on its website, but selling GPUs to other industries like auto, manufacturing, and cloud computing is a little more complicated.As a consequence, there's a lot of work besides engineering that goes into supplying GPUs to an auto company or manufacturer.

NVIDIA and Bosch recently partnered to build an AI self-driving car computer. Image source: NVIDIA.

Every year, NVIDIA has one or two chances to achieve design wins with potential customers or partners. Failure to offer a product competitive on functionality and price can lead to lower revenue and lower market share.

Companies in various industries have particular needs, so it's extremely important for NVIDIA to work closely with companies to ensure it provides GPUs that fulfill a specific requirement. This places emphasis not just on great GPU design and engineering, but also on having great people who can form relationships with companies. A key part of NVIDIA's business success is anticipating what companies in different industries need and then supplying the right product at the right price.

Continue Reading Below

This makes the growth of NVIDIA's business in the last few years all the more impressive.

NVIDIA partners include TomTom, which provides mapping technology for self-driving cars; FANUC, a robot manufacturer for automated factories; and auto manufacturers and suppliers including Tesla, Volkswagen AG'sAudi, PACCAR, Bosch, and Europe's top trucking supplier, ZF.

NVIDIA's advancements in GPU technology have left CPU giant Intel (NASDAQ: INTC) scrambling to catch up as the GPU is the only processor capable of handling the computing power needed to teach a car to drive by itself or to power robots in automated factories.

As NVIDIA gets more design wins and creates important partnerships in serving new growth markets, Intel has found itself in a defensive posture and is trying to buy its way to self-driving car dominance through acquisitions, such as its recent deal to buy Mobileye. Intel might be kicking itself for not attempting to acquire a much cheaper NVIDIA five years ago.

The GPU is the processor of the future, and NVIDIA's quickly increasing list of partnerships with major auto and manufacturing companies demonstrates it has the technology and people to succeed in important future growth markets.

Superior financials

NVIDIA's success with GPU development has translated to superior financials compared to its prime GPU competitor, Advanced Micro Devices (NASDAQ: AMD).

NVIDIA finished fiscal 2017 with $6.8 billion in cash and marketable securities and less than $2 billion in debt -- a very healthy net cash position of $4.8 billion. This is a much stronger financial position than AMD's $1.26 billion in cash and $1.4 billion in debt.

The financial picture looks even better for NVIDIA when we take into account its ongoing share repurchases and dividends. NVIDIA's cash generated from operations has increased from $906 million in fiscal 2015 to $1.6 billion in fiscal 2017. In the last three fiscal years, NVIDIA has generated a total of $3.7 billion in cash from operations and distributed a total of $2.8 billion to shareholders through share repurchases and dividends.

While NVIDIA is in a position to reward shareholders with excess cash flow, AMD is in the difficult position of managing its finances in order to pay down debt. This is a major Achilles' heel for AMD as it tries to win back market share in the discrete GPU market.

AMD burned $234 million in cash from operations over the last three fiscal years, causing the company to issue debt in order to pay down debt.

NVIDIA's superior financial situation is a result of better positioning in product design and pricing by its management team led by CEO Jen-Hsun Huang. Going forward, its strong balance sheet and its superior cash flow generation give NVIDIA more resources to investin GPU developmentcompared to AMD.

Find out why Nvidia is one of the 10 best stocks to buy now

Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. (In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the market!*)

Tom and David just revealed their ten top stock picks for investors to buy right now. Nvidia is on the list -- but there are nine others you may be overlooking.

Click here to get access to the full list!

*Stock Advisor returns as of February 6, 2017

John Ballard owns shares of Nvidia. The Motley Fool owns shares of and recommends Nvidia, Paccar, and Tesla. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.