NVIDIA CORPORATION
Fitch Ratings has affirmed and withdrawn the ratings of
Fitch's actions affect
The ratings reflect Fitch's expectation for continued market leadership from solid adoption of NVIDIA's gaming and accelerated computing platforms despite broader headwinds from the coronavirus. A richer sales mix from faster growing graphics processors (GPU) for artificial intelligence in datacenters (DC) should enable NVIDIA to sustain operating EBITDA and FCF margins in the mid- to high-30% and mid-20%, respectively, both strong for the rating.
The proposed acquisition of
Fitch has withdrawn NVIDIA's ratings for commercial reasons. Fitch reserves the right in its sole discretion to withdraw or maintain any rating at any time for any reason it deems sufficient.
KEY RATING DRIVERS
Coronavirus Pandemic's Impact: After strong work-from-home-driven fiscal year first-half demand, Fitch expects headwinds from the pandemic will slow near-term organic growth, despite continued solid adoption of NVIDIA's gaming and accelerated computing platforms. A richer sales mix from faster growing GPUs for artificial intelligence in DC should enable NVIDIA to sustain operating EBITDA and FCF margins in the mid- to high-30% and mid-20% range, respectively, both strong for the rating.
Secular Growth Markets: Fitch believes NVIDIA's technology leadership in GPU based platforms will continue enabling the development of secular growth markets, including gaming and deep learning (DL), and support solid long-term revenue growth. GPU architecture's parallel processing enables accelerated computing, unlocking demand for AI across a wide range of training and inference workloads, including natural language recognition and, longer term, autonomous driving. NVIDIA's platforms also push richer gaming experiences and, as a consequence, significant demand for gaming.
Strong Profitability Profile: Fitch expects a richer sales mix and operating leverage from a high level of platform adoption will enable NVIDIA to sustain profit margins near higher recent levels. Fitch forecasts operating EBITDA margins in the 30% range through a macroeconomic cycle, versus margins in the 20% range prior to the company shifting focus to higher value sales. Fitch expects some profit margin degradation over time from competing architectures in deep learning and autonomous driving, as customers consolidate share, and with the addition of ARM.
Conservative Financial Policies: NVIDIA's use of equity to fund the majority of the proposed ARM acquisition supports the company's conservative financial policies, despite incurring debt to bolster liquidity and partially fund the
Significant Technology Risk: Fitch believes technology risk is significant, given the large investments and pay-offs associated with transformative markets with robust growth prospects. Fitch believes NVIDIA will retain its technology leadership positions through at least the forecast, but customers will support competing architectures to ensure long-term innovation. As a result, Fitch expects customers will also adopt new start-up technologies and competing architectures from existing industry rivals, although significant market growth rates provide ample opportunities for multiple architectures.
Gaming Platform Leader: NVIDIA's strong share positions in gaming markets and meaningful network effect provide consistent and solid cash flow for reinvestment in nongaming specialized platforms. NVIDIA's technology leadership improved rendering for richer gaming experiences, attracted developers and game franchises and become the platform of choice for rapidly growing e-sports, where success is partially driven by NVIDIA's latest and greatest gear. Nonetheless, competition, long relegated to price competition, strengthened offerings in part by going to market with products at smaller geometries, likely resulting in modest share losses for NVIDIA.
Mellanox Acquisition: The
DERIVATION SUMMARY
Fitch believes NVIDIA is well positioned relative to peers in each of its platform markets, given its unique and cumulative intellectual property from long-term investing in processors and software and the proposed combination with ARM. In gaming, NVIDIA's technology leadership has resulted in a large installed platform base and significant share leadership in faster growing competitive gaming markets. In DL, Fitch believes NVIDIA is the market leader, but faces competitors with financial flexibility that ranges from more limited to significantly greater.
While Fitch expects customers to support alternative architectures, competitors ranging from custom silicon cloud partners to field programmable gate array architecture lack platforms with significant SW content and programmability. NVIDIA is also a market leader in autonomous driving, but Fitch expects intensifying competition, as this nascent market continues to develop. From a profitability and financial structure, NVIDIA is well positioned versus competitors with profit and cash flow margins strong for the current rating and sufficient FCF to support investments.
KEY ASSUMPTIONS
Slower organic growth through fiscal 2022, stemming from the pandemic followed by a resumption of more robust demand beginning in fiscal 2023;
Acquisition of Arm occurs at the end of fiscal 2022 as expected with available cash more than sufficient to meet the cash portion of the deal;
Operating EBITDA margin remain in the mid- to high-30% range through fiscal 2022, but are partially diluted by the addition of ARM, which has operating EBITDA margins in the mid-30% range due to exposure to smartphones, tablets and, over time, IoT;
Capital spending is 4%-5% of revenue and dividends grow modestly in the near term but by 10% annually thereafter;
Dividends grow by 10% annually beginning in fiscal 2022;
NVIDIA refinances upcoming senior notes maturities, given headroom under Fitch's negative leverage sensitivities;
No share repurchases until NVIDIA consummates the ARM acquisition, after which point the company uses all of pre-dividend FCF for stock buybacks.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Sustained share gains supporting NVIDIA's technology roadmap and competitive advantage;
Increased end market diversification reducing gaming exposure to one-third of consolidated revenue;
Total debt to FCF and total debt to operating EBITDA below 1x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Sustained revenue growth below that of core markets, indicating technology driven share losses;
Total debt to FCF sustained above 3x and total debt to operating EBITDA sustained above 1.5x.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Fitch expects liquidity to remain solid, and, as of
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
ENTITY/DEBT RATING PRIOR
Nvidia Corporation LT IDR A Affirmed A
LT IDR WD Withdrawn A
ST IDR F1 Affirmed F1
ST IDR WD Withdrawn F1
senior unsecured
LT A Affirmed A
senior unsecured
LT WD Withdrawn A
senior unsecured
ST F1 Affirmed F1
senior unsecured
ST WD Withdrawn F1
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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