Performance Management and Valuation

Performance Management and Valuation

Introduction

The information provided in this task evaluates the financial performance of two companies, namely NVIDIA and Intel. The two companies operate in the electronics industry, whereby NVIDIA manufactures integrated circuits used in electronics such as computers (Choquette et al., 1). On the other hand, Intel designs and manufactures computer-related products and components such as chipsets, microprocessors, graphic networks, and flash memory. Notably, the two companies are compared regarding their efficiency in generating income, growth, profitability, and market valuation. Further, an analysis regarding whether the two companies can merge their operations to enhance synergy is performed.

Analysis and Recommendations

Performance Metrics

Which company is a more efficient generator of income?

NVIDIA is a more efficient generator of revenue than Intel. Notably, the percentage of revenue raised in 2021 and 2020 indicates this. Despite losing in 2020, the company grew its revenue by 52.73% compared to 1.49% of Intel.

Which company is growing faster?

NVIDIA is growing faster than Intel. Essentially, this is indicated by the growth in revenue, operating income, and net income in 2021. In 2020, both companies had a poor performance due to reduced sales due to the COVID-19 pandemic. However, in 2021, NVIDIA grew significantly, with each of the metrics growing by more than 50%, unlike Intel, which made a loss in operating income and net income despite a slight growth in revenue of 1.49%.

Using financial health ratios, which company is more profitable?

The financial health ratios indicate that NVIDIA is more profitable than Intel. Notably, this is so because the company had better values for the quick and debt-to-equity ratios, while a relatively similar performance was recorded regarding interest coverage.

Which company has more robust valuation ratios?

NVIDIA’s valuation ratios prove to be stronger than those of Intel because they are higher. Intel has higher values for the earning yield metric. However, NVIDIA has the majority of the higher values, including price/sales, price/earnings, and price/book ratios, and thus, a better performance.

Overall, which company is better run and why?

The metrics used in comparing the two companies indicate that NVIDIA is run better than Intel. Notably, this is so because the company has better valuation, growth, and financial health performance. When considering the element of profitability, NVIDIA had a better performance concerning the return on assets and the return on invested equity. On the other hand, Intel had a better performance regarding net margin, while the performance regarding return on equity was almost similar for the two companies across the two years. Therefore, to understand the company that is run better than the other, one should consider the number of metrics that favour each. In total, NVIDIA performed better across the two years than Intel based on ten metrics, while Intel performed better than NVIDIA on two metrics. Further, the two companies had relatively similar performance regarding the return on equity and interest coverage. Thus, it can be concluded that NVIDIA is run better because of a better performance.

Merger Synergies

If there was an acquisition, which company is the most likely acquirer? Why?

In the case of an acquisition, NVIDIA is better placed to acquire Intel than the reverse. Notably, this is so because the analysis performed regarding valuation, growth, financial health, and profitability shows a better performance for NVIDIA. According to Čirjevskis (2), acquiring firms can afford to acquire their competitors with lower performance to eliminate competition and enhance profitability. Based on this rationale, NVIDIA is the one that is more likely to be an acquirer in the case of an acquisition.

Would you recommend a merger or acquisition to increase the moat strength of the combined companies? Why or why not?

I would support a merger between NVIDIA and Intel. Notably, this is so because more benefits, including moat strength, will be achieved by merging. The moat strength will arise from the company’s economies of scale becoming bigger after the merger, reducing competition between them and creating competitive prices.

If you support a merger or acquisition, identify three performance metrics that could be improved by a merger and explain how they would be improved.

A merger between NVIDIA and Intel will improve various performance metrics. However, only three are identified for discussion. The three include the net margin, revenue, and debt to equity. The net margin will be improved because a merger will reduce competition-related expenses. One example of such expenses is the advertising cost, which seeks to outdo each other in the market. In the case of a merger, the expense will be reduced, thus boosting the net margin. Revenues will also increase upon the merger of the two companies. Essentially, this is so because when the two combine, they will become a more prominent firm and draw on economies of scale to offer affordable prices and enhance their sales (Zhang et al., 3). Lastly, the debt to equity will be improved for the merger. Notably, this is so because more revenues will be generated to service the debt levels and reduce them.

References

Choquette, J., Gandhi, W., Giroux, O., Stam, N., & Krashinsky, R. (2021). NVIDIA A100 tensor core GPU: Performance and innovation. IEEE Micro, 41(2), 29-35.

Čirjevskis, A. (2021). Exploring the link of real options theory with dynamic capabilities framework in open innovation-type merger and acquisition deals. Journal of Risk and Financial Management, 14(4), 168.

Zhang, W., Wang, K., Li, L., Chen, Y., & Wang, X. (2018). The impact of firms’ mergers and acquisitions on their performance in emerging economies. Technological Forecasting and Social Change, 135, 208-216.

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Assignment 2: Performance Management and Valuation

Due Week 6, Sunday (18% of final grade)

Performance Management and Valuation

The risk analysis work you did in the first assignment was a great start. It helped to paint a picture of

where NVIDIA (NASDAQ: NVDA) and Intel (NASDAQ: INTC) are in their corporate lifecycles, the threats

and opportunities each face, and the defensibility of their economic moats – a metaphor that Buffett loves

to use.