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Deep Dive: Only two stocks in the benchmark semiconductor index beat Nvidia when ranked by these three measures

After the stock market closed Feb. 16, Nvidia Corp. reported a blowout quarter, which included sales rising 53% to a record high from a year earlier. The company’s outlook for the next quarter also came in higher than analysts had expected.

Read: Nvidia profit doubles, and executives see accelerated growth ahead despite supply-chain concerns

Nvidia’s
NVDA
shares dropped 7.5% the following morning.

Why might that have happened? Because some investors apparently believe the company cannot do any better.

Nvidia’s massive margins

The reason some investors might believe Nvidia has achieved peak performance is that it had its best quarter in at least 10 years by three commonly used profitability measures.

Gross margin – fourth quarter, fiscal 2022

Gross margin – fourth quarter, fiscal 2021

Operating margin – fourth quarter, fiscal 2022

Operating margin – fourth quarter, fiscal 2021

Net margin – fourth quarter, fiscal 2022

Net margin – fourth quarter, fiscal 2021

66.53%

63.10%

44.94%

36.78%

39.29%

29.12%

Source: FactSet

Nvidia’s fourth quarter of fiscal 2022 ended Jan. 30 — many companies have fiscal years that don’t match the calendar.

For the quarter ended Jan. 30, all three of these profit margins for Nvidia were at their highest levels in at least 40 quarters.

More about the margins:

A company’s gross margin is its sales, less the cost of goods sold, divided by sales. It is higher than operating margin, because it excludes overhead not related to producing or selling products or services. It also gives an indication of pricing power — a declining gross margin while sales are increasing might indicate a company is lowering prices or offering more discounts to defend its market share. A widening gross margin as sales increase is a good sign. Nvidia’s gross margin has now exceeded 60% for six straight quarters.

The operating margin is, essentially, earnings before interest, taxes, depreciation and amortization (EBITDA) divided by sales. Nvidia ran with operating margins well above 40% for all of fiscal 2022. Below that, operating margins were below 40% since the first quarter of fiscal 2019.

A company’s net margin is its net income divided by sales. Over the past 10 years, Nvidia’s net margin exceeded 30% all through fiscal 2022. Over the previous nine years, the company hadn’t achieved a similar four-quarter run. Investors need to be careful when considering net margin — during any given quarter, a one-time non-operating event can have a gross affect on a company’s GAAP earnings.

Nvidia’s margins versus its peers’

How do Nvidia’s margins compare with those of other members of its sector index? The answer is very well, if we compare Nvidia to the other 29 stocks in the PHLX Semiconductor Index
SOX,
which is tracked by the iShares Semiconductor ETF
SOXX.
Yes, it may be “unfair” to compare the profit margins of companies with different business models, but there is no need for investors to make fair comparisons.

What follows are top-10 rankings for each of the margins among the SOXX 30, according to the most recent quarterly data provided by FactSet:

Gross margin

Company

Ticker

Quarterly gross margin

Gross margin rank

Date of most recent financial report available in FactSet

 Universal Display Corp. 

OLED

74.07%

1

09/30/2021

Xilinx Inc. 

XLNX

71.56%

2

01/01/2022

Texas Instruments Inc. 

TXN

69.33%

3

12/31/2021

Nvidia Corp. 

NVDA

66.53%

4

01/30/2022

Lattice Semiconductor Corp. 

LSCC

64.23%

5

01/01/2022

KLA Corp. 

KLAC

60.86%

6

12/31/2021

Qualcomm Inc 

QCOM

59.80%

7

12/26/2021

Teradyne Inc. 

TER

59.34%

8

12/31/2021

Monolithic Power Systems Inc. 

MPWR

57.62%

9

12/31/2021

Broadcom Inc. 

55.99%

10

10/31/2021

Source: FactSet

You can click on the tickers for more about each company.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

Operating margin

Company

Ticker

Quarterly operating  margin

Operating margin rank

Date of most recent financial report available in FactSet

 Taiwan Semiconductor Manufacturing Co. Ltd. ADR 

TSM

66.99%

1

12/31/2021

Texas Instruments Inc. 

TXN

57.33%

2

12/31/2021

Broadcom Inc. 

AVGO

55.73%

3

10/31/2021

Micron Technology Inc. 

MU

55.48%

4

12/02/2021

Universal Display Corp. 

OLED

47.72%

5

09/30/2021

United Microelectronics Corp. ADR 

UMC

47.43%

6

12/31/2021

Microchip Technology Inc. 

MCHP

46.39%

7

12/31/2021

Nvidia Corp. 

NVDA

44.94%

8

01/30/2022

KLA Corp. 

KLAC

44.70%

9

12/31/2021

Skyworks Solutions Inc. 

SWKS

41.70%

10

12/31/2021

Source: FactSet

Net margin

Company

Ticker

Quarterly net margin

Net margin rank

Date of most recent financial report available in FactSet

Texas Instruments Inc. 

TXN

44.06%

1

12/31/2021

Nvidia Corp. 

NVDA

39.29%

2

01/30/2022

Taiwan Semiconductor Manufacturing Co. Ltd. ADR 

TSM

37.94%

3

12/31/2021

ASML Holding N.V. ADR 

ASML

35.57%

4

12/31/2021

Universal Display Corp. 

OLED

31.93%

5

09/30/2021

Qualcomm Inc 

QCOM

31.75%

6

12/26/2021

KLA Corp. 

KLAC

30.52%

7

12/31/2021

Micron Technology Inc. 

MU

30.00%

8

12/02/2021

Xilinx Inc. 

XLNX

29.68%

9

01/01/2022

Applied Materials Inc. 

AMAT

28.58%

10

01/30/2022

Source: FactSet

Nvidia ranks within the top 10 for each of the quarterly profit margins.

Combined margin score

A next step, while hardly scientific (especially in light of the accounting vagaries that can affect net earnings), might be to score the companies by adding their rankings for each of the the margins together, and then sort by combined score — in ascending order. Here are the results for the most recent available quarters:

Company

Ticker

Combined margin score – lower is better

Gross margin

Operating  margin

Net margin

Texas Instruments Inc. 

TXN

6

69.33%

57.33%

44.06%

Universal Display Corp. 

OLED

11

74.07%

47.72%

31.93%

Nvidia Corp. 

NVDA

14

66.53%

44.94%

39.29%

Taiwan Semiconductor Manufacturing Co. Ltd. ADR 

TSM

18

52.66%

66.99%

37.94%

KLA Corp. 

KLAC

22

60.86%

44.70%

30.52%

Qualcomm Inc 

QCOM

24

59.80%

39.89%

31.75%

Broadcom Inc. 

AVGO

26

55.99%

55.73%

26.85%

Xilinx Inc. 

XLNX

27

71.56%

35.44%

29.68%

ASML Holding N.V. ADR 

ASML

28

54.17%

38.95%

35.57%

Micron Technology Inc. 

MU

33

46.38%

55.48%

30.00%

Source: FactSet

Nvidia is in the top 10 among the SOXX 30 for all three margins, while ranking third for the combined score, behind Texas Instruments Inc.
TXN
and Universal Display Corp.
OLED.

Again, the scoring may not be the most important factor, especially if a company is focusing on growth while showing relatively small profits as it reinvests in its expansion. Each margin can be a useful tool for investors.

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