NVIDIA (NASDAQ: NVDA) reported powerful fiscal second-quarter 2018 results on August 10. The graphics-chip specialist's revenue leaped 56%, earnings per share soared 124%, and adjusted EPS jumped 91%. Revenue and earnings both cruised by Wall Street's estimates. (You can read my earnings take here.)
There was one key takeaway from NVIDIA's earnings report that many investors probably missed, but is worth knowing: Cash flows were strong.
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Robust Q2 cash flows
Cash flows are like the Rodney Dangerfield of earnings report metrics -- they get no (or at least little) respect, with revenue and earnings getting top billing. But cash flows are critical metrics -- and ones that many experienced investors and all professional investors pay very close attention to.
Cash flows provide an accurate snapshot of how well a company is performing. Operating income -- the income a company generates from its operating activities -- and net income, or "earnings," are just accounting measures, while operating cash flow and free cash flow (FCF) are the real McCoys when it comes to money. All sorts of things -- legitimate and not -- can greatly affect a company's reported operating income and earnings.
Over the shorter and intermediate terms, operating cash flow is usually the better metric to consider than FCF because FCF will bounce around depending upon how much a company is investing for growth.
Here are NVIDIA's key metrics in the quarter, with operating and free cash flows tacked on at the bottom of the chart.
Beyond just noting the absolute strength of operating and free cash flows, investors should pay attention to the relative strength of these metrics by comparing these cash metrics to their respective accounting metric counterparts as follows:
This was a good quarter for NVIDIA with respect to relative cash flows. Its operating cash flow was greater than its GAAP operating income and not that much less than its adjusted operating income. The FCF picture was even better, with FCF greater than both GAAP and adjusted net income.
Now, investors shouldn't be concerned if there are short or intermediate periods of time where the accounting metrics are greater than their respective counterpart cash metrics. However, there would be cause for further digging if this type of dynamic continued over the longer term, particularly with operating income vs. operating cash flow. FCF can vary quite a bit, especially for tech companies that need to invest for growth to remain competitive.
A more robust balance sheet than rival Advanced Micro Devices
While we're on the topic of cash, it's worth noting that NVIDIA's balance sheet is much stronger than that of its discrete graphics processing unit (GPU) rival, Advanced Micro Devices. AMD is NVIDIA's archival in its largest market, gaming, which accounted for 53% of NVIDIA's revenue in the second quarter. Both companies offer graphics cards to gamers.
Cash is king, especially in the fast-evolving tech arena, and provides companies with the ability to invest for growth -- internally and via acquisitions -- and return value to shareholders in the form of share buybacks and/or paying dividends. Thus, investors should consider cash flows as well as the strength of a company's balance sheet when considering investing in a company's stock.
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