Nvidia (NASDAQ:NVDA) recently issued $5 billion in investment-grade bonds. The most lucrative of the four notes pays 3.7% annual interest and matures on April 1, 2060, a little under 40 years from now. I don’t know about you, but if I was 25, I’d much rather own NVDA stock over the next 40 years.
General Corporate Purposes
As the Nvidia bond prospectus states, the company will generate $4.97 billion in net proceeds from the four bond offerings. It plans to use the funds for general corporate purposes and to fortify the company against the wrath of Covid-19. This is in addition to the $15.9 billion in cash on its balance sheet at the end of January.
The four notes provide Nvidia with long-term funding at reasonable rates of interest between 2.85% and 3.7% with maturities between 10 and 40 years in duration. The $4,97 billion is in addition to its existing debt of $2.0 billion. The total interest on all of its debt if held to maturity would be approximately $4.2 billion.
Wouldn’t it be nice if small business owners could issue debt at such low rates of interest? The need for Small Business Administration loans would be non-existent. Institutions are willing to buy these notes because they believe Nvidia is a good bet to be around 10, 20, 30, and 40 years from now.
How About Nvidia’s Rival in the Gaming World?
I’m talking about Advanced Micro Devices (NASDAQ:AMD), the darling of chip stocks. AMD’s stock was up 22% year to date to date, including dividends, through April 23 and 100% over the past 52 weeks, well ahead of Nvidia; NVDA stock is up 21% in 2020 and 49% over the same periods.
What’s AMD doing to bolster its financial position during Covid-19? As far as I can tell, it hasn’t done anything to raise more cash, although it does have a $500 million secured revolving credit facility that it hasn’t drawn on yet.
It finished 2019 with net cash of $818 million based on long-term debt of $487 million, long-term operating lease liabilities of $199 million, and cash and marketable securities of $1.5 billion.
Nvidia’s net cash is more than ten times greater than AMD’s. Yet Nvidia’s market cap is only 2.7 times larger than AMD. Should the you-know-what hit the fan, Nvidia is far more prepared.
But AMD is a well-run company. CEO Lisa Su has taken a broken business and turned it into a well-oiled machine. She’s one of only three women to run a Fortune 500 tech company. That doesn’t happen without a lot of talent and drive.
CNN recently ran a story with the headline, From the brink of bankruptcy to a 1,300% stock gain: How This CEO turned around her company. AMD stock hit an all-time high of $59.27 on Feb. 19. Since then, it’s fallen a few dollars but is still trading at 129 times its cash flow, 3.5 times greater than NVDA stock.
The Bottom Line on NVDA Stock
Not only have Nvidia’s bond issues put it in a better cash position than AMD, but as I’ve said in the past, its superior free cash flow makes it a stronger candidate during the current economic downturn.
Further, as InvestorPlace’s Louis Navellier recently stated, Nvidia generates about 50% of its profits from gaming. With the coronavirus keeping people at home, many of them are turning to video games. As a result, Nvidia’s free cash flow might not take a big hit from the pandemic.
Over the past 15 years, Nvidia’s delivered an annualized total return to its shareholders of 28%. I think there’s a good chance it will do that again over the next 15 years.
If I were 25 and looking for a good 40-year investment, Nvidia’s stock would be at the top of my list. It’s a long-term buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.