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

Nvidia’s
NVDA,
-7.56%
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.

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,
-3.74%,
which is tracked by the iShares Semiconductor ETF
SOXX,
-3.76%.
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

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

Net margin

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:

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,
-2.13%
and Universal Display Corp.
OLED,
-5.98%.

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.

Don’t miss: As investors punish Shopify, these 15 ecommerce companies are expected to grow sales the most through 2023