How Has Nvidia’s COGS Growth Impacted Its Earnings Over The Recent Years?

Nvidia’s (NASDAQ:NVDA) cost of goods sold (COGS) was the biggest expense head for the company, with it being about 50% of total expenses in fiscal 2016, before increasing to 58% of total expenses in fiscal 2019. This increase alone has impacted the company’s profits by $2.3 billion, translating into a $3.76 impact on earnings per share between fiscal 2016 and fiscal 2019. While COGS has accounted for a higher proportion of total expenses over the past few years, as a percentage of revenues it has declined from 44% in fiscal 2016 to 39% in fiscal 2019. This figure is in line with that of Intel. Over the recent years, Nvidia has seen steady revenue and expenses growth. However, its total expenses as a percentage of revenue has largely declined. In this note we discuss the key drivers of Nvidia’s total expenses. You can look at our interactive dashboard analysis ~ NVDA Expenses: How Does Nvidia Spend Money? ~ for more details.

Nvidia’s Net Income Margin Has Grown In Recent Years

• Nvidia’s net income margin grew from 12% in fiscal 2016 to 34% in fiscal 2019.
• Although, it is expected to decline to 20% in fiscal 2020, amid increased expenses, primarily R&D and taxes, as discussed in the sections below.

Nvidia’s Total Expenses Have Increased From $4.4 Billion In Fiscal 2016 To $7.8 Billion In Fiscal 2019.

• Nvidia’s total expenses have grown from $4.4 billion in 2016 to about $7.8 billion in fiscal 2019.
• For fiscal 2021, we expect total expenses to be around $9.7 billion, which comprises of:
  • 1) Operating Expenses: $9.1 billion
  • 2) Non-Operating Expense: $237 million
  • 3) Income Taxes: $374 million
• Below, we take a look at how the company’s key expense components have trended and the key reasons for the change.

1. Operating Expenses Have Been On A Rise

• Operating expenses increased from $4.3 billion in fiscal 2016 to $7.9 billion in fiscal 2019, driven by
  • (A) $2.3 billion increase in COGS,
  • (B) $1.0 billion increase in R&D, and
  • (C) $258 million increase In SG&A

(A) Cost of Goods Sold (COGS)

• COGS grew from $2.2 billion in fiscal 2016 to $4.5 billion in fiscal 2019, driven by higher sales.
• As a % of revenues, cogs has declined from 44% to 39% over the same period.

(B) Research & Development (R&D)

• R&D expenses increased from $1.3 billion in fiscal 2016 to about $2.4 billion in fiscal 2019, led by employee additions.
• As a % of revenue, r&d expenses have declined from 27% to 19% during the same period.
• However, it has been trending higher in fiscal 2020, driven by high employee related costs.

(C) Selling, General & Administrative (SG&A)

• SG&A expenses have increased slightly from $0.7 billion in 2016 to $1.0 billion in fiscal 2019.
• As a % of revenues, SG&A has declined from 15% to 8% during the same period.

2. Nvidia’s non-operating expenses, which refers to interest & other income/expenses, grew from -$4 million in fiscal 2016 to $92 million in fiscal 2019, driven by lower financing costs.

3. Income Tax Expense Has Declined In The Recent Years. 

• Nvidia’s income tax expense has declined from $129 million in 2016 to -$245 million in fiscal 2019, reflecting lower tax rate and tax credits & benefits.
• Effective tax rate has declined from 17% in fiscal 2016 to -6% in fiscal 2019, but it will likely go up in the near term, amid an absence of tax benefits seen in the last fiscal year.

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