Should You Buy NVDA Stock? 3 Pros, 3 Cons

Despite relatively flat performance for most of the year, NVDA stock is still a great long-term buy

Nvidia Corporation (NVDA) has been on a roller coaster ride for the past year … so should you scoop up NVDA stock now, or hang tight and hope the price settles down in the future?

For all its ups and downs, Nvidia stock is up almost 22% this year, but 18% of that came between Jan. 2 and Feb. 24. Since then, shares have been lagging theNasdaq by a couple percentage points.

2014 hasn’t been kind to some of the industry’s largest chipmakers, as Advanced Micro Devices (AMD) andQualcomm (QCOM) are down more than 31% and almost 5% YTD, respectively.

Despite unimpressive results recently for NVDA stock, the company has been taking steps to further solidify its relationshipswith Google (GOOG) and Hewlett-Packard (HPQ) to continue providing processors for new tablets and Chromebooks.

Investors might consider Nvidia a viable option for medium- to long-term growth, and some of the industry’s tech analysts are bullish on NVDA stock for the next five to 10 years. However, technology is one of the fastest-changing industries, so let’s consider some pros and cons of adding NVDA stock to your portfolio.

NVDA Stock Pros

Diversified Product Offerings: One of Nvidia’s most valuable assets is the company’s broad range of graphics chips for both desktop computers and — thanks to ongoing arrangements with Google — tablets and smartphones as well. Nvidia GPUs are in Google’s Nexus 9 tablet, as well as new versions of the Chromebook. NVDA’s Tegra processors remain the first choice for both Google and Hewlett-Packard, and Tegra sales have grown 51% year-over-year. Nvidia’s GeForce brand is up 36%, and sales of high-end gaming laptops with Nvidia graphics processors increased more than 200%. The company’s expansion into automotive infotainment also led to 200% growth in revenue from that arena. While Nvidia does not provide separate figures for each of its GPUs, it’s clear from the company’s solid track record of steadily increasing revenue that even a decrease in – or total loss of — one area wouldn’t necessarily be detrimental.

Profitability: With total revenue in excess of $1.2 billion for the most recent quarter, and gross profit of $676 million, NVDA stock beat estimates by a comfortable margin. Gross margin for the trailing 12 months is 55.11 — for every dollar of revenue generated, the company keeps more than 55 cents — which is on the high end of the technology sector’s average of 52.23. Nvidia’s ability to retain profits demonstrates the company’s strength as a viable long-term option. Management is committed to remaining on the forefront of technological innovation, with specific focus on improving speed, power and battery life for mobile devices.

Financial Leverage: Nvidia has more than $4.2 billion in cash alongside only $1.4 billion of long-term debt. The company’s free-cash-flow-to-sales ratio — what percentage of revenue is converted to free cash flow — is 15, which is encouraging considering many analysts consider a stock with an FCF-to-sales ratio higher than 10 to be extremely favorable. By comparison, AMD, one of Nvidia’s most notable competitors in the graphics chip arena, has an FCF-to-sales ratio of negative 4.9. With annual cash flow of more than $835 million, Nvidia has the ability to continue expanding globally and further developing cutting-edge graphics processors for mobile and desktop.

NVDA Stock Cons

Foreign-Held Cash: There is a problem with that $4 billion-plus cash hoard, though. Much of it is held outside of the country, and thus Nvidia can’t fully utilize the money without returning it to the U.S. — a process that would result in a significant tax bill for the repatriated cash. Taxes would effectively reduce the actual amount of cash possessed by the company, further limiting NVDA’s capabilities. To avoid paying the taxes, NVDA is forced to take on new debt to fund future ventures, which essentially makes all that cash irrelevant.

Significantly Increasing Debt: To that point, at the end of last year, Nvidia announced a plan to return $1 billion to shareholders. Instead of using its available cash reserves, the company chose to fund the plan by taking on new debt in the form of convertible notes. While NVDA benefits from a lower interest rate on these convertibles, shareholders will suffer if the company continues to perform well, as these notes allow debt holders to convert their bonds to stock.

Desktop PC Declines: NVDA stock has suffered in recent years as more consumers move from desktop computers to smartphones and tablet devices. More than half of its core product line consists of graphics processors, but decreasing demand for PCs amid a saturated market means increased competition will continue to threaten future GPU sales.

The Verdict

Considering NVDA’s innovation in the mobile arena, the stock will perform better with upcoming releases of new Android-powered tablets and smartphones, despite lagging desktop PC sales. In the future, NVDA’s focus will continue to evolve toward being mobile-centric, and the company’s solid positive cash flow will allow for ongoing R&D.

The price of NVDA stock has remained relatively flat for most of the year, but that could change very soon as the holiday season arrives and retail sales of computers and mobile devices increase. Nvidia is a wise choice for medium- to long-term portfolios, and now is a good time to acquire shares.

Article originally appeared on InvestorPlace.com (11/20/2014)