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NVIDIA Corp. (NVDA - Analyst Report) is set to offer convertible senior notes worth $1.3 billion, due on 2018, to qualified institutional buyers. The senior note bears interest of 1% per annum that is to be paid semi-annually on Jun 1 and Dec 1 every year.

NVIDIA plans to use the net proceeds from the issuance to primarily fund its capital return initiative though buybacks and dividends announced in the last reported quarter. At the end of the third quarter of fiscal 2014, the company authorized a stock repurchase plan worth $1.286 billion ending in Jan 2016.

The company also intended to increase shareholders’ value through stock repurchases and quarterly dividend payments and expects to distribute $1 billion in 2015. Moreover, NVIDIA increased its quarterly dividend payment by 13% and set Dec 13, 2013 as the payment date.

Moreover, NVIDIA intends to use the proceeds for certain convertible note hedge transactions which is expected to reduce the dilution effect when the notes are converted to shares. Although the company has a strong balance sheet with cash, cash equivalents and marketable securities of $3.03 billion and long-term liabilities worth $387.8 million, this issuance will further increase its liabilities.

Nonetheless, we believe that NVIDIA is gaining strength in gaming and high-end notebook GPUs. Moreover, NVIDIA’s Tegra segment performed robustly due to the shipment of Tegra 4 processors to 15 mobile device manufacturers including Hewlett Packard (HPQ - Analyst Report), Microsoft (MSFT - Analyst Report), Asus, Toshiba and Acer to name a few. The company expects the Tegra processors to generate incremental revenues, going forward, due to their acceptability and demand.

However, the continuous decline in PC sales does not help NVIDIA’s GPU business. Competition from the likes of Intel Corp. (INTC - Analyst Report) and QUALCOMM and higher operating expenses are also expected to hurt profitability in the near term.

Currently, NVIDIA carries a Zacks Rank #3 (Hold).

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