Automotive & Shield To Drive Nvidia’s Tegra Business In Fiscal 2016

Leading GPU processor developer, Nvidia (NASDAQ:NVDA) announced its fiscal 2015 earnings on February 11th. With a 13% and 51% growth in fiscal 2015 revenue and earnings per diluted share, respectively, the company seems to be making excellent progress on its strategy of creating an ecosystem in gaming, enterprise graphics, accelerated computing and automotive graphics. In addition to beating its Q4 2014 guidance, Nvidia’s Q1 2016 revenue outlook was slightly above the consensus estimate of $1.16 billion. (Read Our Earnings Article)

Nvidia’s focus on addressing the top 30% of the market (mainly those vertical segments where visual computing matters the most) is clearly paying off and has helped it outpace the PC market (where it has always had a significant exposure). In this article we discuss the company’s Tegra business and the key drivers expected to spur growth in the division.

After growing at a robust rate in fiscal 2012 and 2013, Nvidia’s Tegra revenue declined 48% in fiscal 2014.  The company saw its Tegra revenue decline significantly in the first half of fiscal 2014 due to the ramp down of Tegra 3 products and the company’s conscious decision to delay the launch of Tegra 4 by one quarter, in order to pull up the production of Tegra 4i chips. However, Nvidia witnessed 110% and 18% sequential growth in Tegra revenues in Q3 2014 and Q4 2014, respectively, as it saw a rising number of Tegra-4 powered devices hit the market. The company retained its growth momentum in fiscal 2015, with the Tegra revenue base expanding by 45% during the year.

While mobile computing has been a key focus area and the largest segment for Nvidia’s Tegra business in the last few years, the company claims that automotive and SHIELD (Nvidia’s gaming device) now represent the vast majority of its Tegra revenue. Nvidia expects the two segments to be the biggest growth driver for its Tegra division in fiscal 2016.

Our price estimate of $20 for Nvidia is approximately 10% below the current market price.

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The Automotive Segment Is The Fastest Growing Tegra Division

The automotive segment is the fastest growing sub-segment of Nvidia’s Tegra business and offers higher gross margins (compared to devices). In Q4 2015, Nvidia’s automotive segment revenue almost doubled year on year.

Automotive electronics is a large market and it is going through a transition  as cars have increased computing capability in both the drive train and the dashboard. Increasingly, dashboard functionality within cars (infotainment system, digital cluster and automatic driver assistance) are being computerized. Strategy Analytics expects the market for Advanced Driver Assistance Systems to be worth around $15 billion by 2016, with a CAGR of 23%. ^[1] Nvidia  has been working on building its automotive computing platform for over a decade and is in a strong position to leverage this growth. The company’s automotive platforms remain on a sharp upward trajectory with over 7.5 million cars using Nvidia’s technology at present, up from 4.7 million a year ago.

At the 2015 Consumer Electronics Show (CES, held in January), Nvidia expanded its automotive product portfolio with two highly advanced automotive computing platforms, both of which are based on its latest CPU offerings.  These include:  1) the NVIDIA DRIVE PX, a new platform for developing auto-pilot capabilities using its latest Maxwell GPU; and, 2) the NVIDIA DRIVE CX, for creating the most advanced digital cockpit systems. Drive is basically a mobile super chip, a mobile super computer, with dedicated software on top. It provides for 3 basic functionalities: 1) advanced digital cockpit, 2) surround vision; and, 3) deep learning technology,

The company also announced the addition of Tegra X1, which utilizes Nvidia’s most advanced PC architecture (Maxwell) for graphics processing units, to its Tegra chip family.

Nvidia Eyes The Android Gaming Market

Nvidia launched Shield, its maiden attempt as a gaming hardware provider, in July 2013. Shield (powered by Tegra 4) is an Android-based portable gaming console that also offers PC game streaming features. What differentiates Shield from other devices is that it is the only device to play Android games with an integrated gamepad.

Last quarter, Nvidia powered the holiday season’s two best-reviewed Android tablets, the Google Nexus 9 and its own SHIELD Tablet. More than a dozen media outlets recommended SHIELD in their holiday gift giving guides. Over the course of the quarter, SHIELD, which has pioneered a premium gaming experience for tablets, became one of the very first devices to be upgraded to the Google’s latest OS, Android 5.0 Lollipop. ^[2]

The gaming hardware  market was worth $23.6 billion in 2012 and the global gaming market is estimated to cross $30 billion by 2015. ^[3] Nvidia aims to focus on developing the Android gaming market. Android is the world’s largest operating system platform, and the company believes that over time it will also be one of the world’s largest gaming platforms. Nvidia intends to leverage the capability and expertise it has developed in the PC industry in the last 15 to 20 years for the Android gaming market.

Nvidia claims that the mobile gaming market is a $70 billion market and is growing rapidly internationally. The mobile cloud is probably one of the most important disruptions in the history of computing, and yet there’s really no computer gaming architecture that serves mobile cloud very well. According to Nvidia, SHIELD helps to create the platform that allows mobile cloud to bring gaming to a lot more people. The company believes that its gaming business is really strong, and promises to bring out some exciting new things to the market in the near future.

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1. as cited in Nvidia’s CEO Discusses F4Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 [↩]
2. Nvidia’s Q4 2015 Earnings Call Transcript, Seeking Alpha, February 11, 2015 [↩]
3. PC Gaming Hardware Market to Hit $23.6 Billion in 2012, Jon Peddie Research, May 3, 2012 [↩]