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Investment Overview for nVIDIA (NASDAQ:NVDA)
Below are key drivers of Nvidia's value that present opportunities for upside or downside to the current Trefis price estimate for Nvidia:
- Faster Than Expected Growth In Automotive & Shield Tegra Processors: We currently forecast Nvidia's Tegra revenue
to increase from $579 million in 2014 to approximately $1.2 billion by the end of the Trefis forecast period. 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 has been working on building its automotive computing platform for over a decade and is in a strong position to leverage this growth, with approximately 8 million cars using its technology at present. In the last few quarters, Nvidia has significantly expanded its Shield lineup, which includes the Shield Android handheld console, the Shield tablet, and an Android TV console. Given its strong graphics and processing capabilities, the company is able to deliver a compact powerful and optimized system to eager gamers. Given the above factors, it is possible that we are currently underestimating the growth potential for Tegra processors. If Nvidia is able to increase its Tegra revenue base to over $2 billion and manages to improve EBITDA margins to 30% (higher revenue contribution from automotive could significantly improve margins), our valuation for the company will increase by approximately 15%.
- Continuous Increase In Nvidia’s Discrete Graphics Market Share: We currently forecast Nvidia’s discrete notebook and desktop GPU market share to remain close to the current level for the rest of our review period. We think that with the intense competition with AMD, Nvidia might not able to sustain any significant increase in its market share in the long run. However, in the last few quarters Nvidia has managed to extend its lead in the GPU market over AMD.Keeping in mind the higher level of investment, for a narrower range of products compared to AMD, Nvidia could manage to further extend its lead in the discrete GPU market. If Nvidia’s market share in the discrete GPU market reaches 90% (in both notebooks and desktops), our valuation for the company will increase by over 10%.
For additional details, select a driver above or select a division from the interactive Trefis split for Nvidia at the top of the page.
Nvidia designs and develops Graphics Processing Units (GPUs), which are high performance processors that generate realistic and interactive graphics on PCs. A computer's Central Processing Unit (CPU) off-loads the burden of graphics processing to GPUs. In this way, a dedicated GPU and CPU work in tandem to increase the overall speed and performance of a system. The GPU market is typically segmented into discrete and integrated GPUs. Integrated GPUs, which were once found in the majority of PCs, have been replaced by Intel and AMD's APUs. However, discrete GPUs are preferred by customers such as gamers or design professionals for high performance and 3D graphics. Within discrete GPUs, high-end discrete GPUs form the professional graphics cards market in which Nvidia has a significant market share. Nvidia sells its products directly to PC manufacturers, such as Dell, HP, Toshiba, and Sony. In addition, the company also sells some of its high-end GPUs directly to consumers through retailers such as Best Buy. Nvidia announced "Project Denver" during the January 2011 Consumer Electronics Show. Project Denver is Nvidia's development of ARM-architecture based CPUs which could challenge the x86 CPU architecture that currently dominates the desktop, notebook and server CPU market. Intel and AMD are the leading x86 CPU players. Since the launch of the project, Nvidia has not talked in detail about its entry in the CPU market. 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 drivers for its Tegra division in fiscal 2016.
The Professional Graphics segment makes a significant contribution to Nvidia's overall valuation due Nvidia's high share in the market.
The importance of Professional Graphics is driven by 2 things:
High Professional Graphics Market Share
We estimate that Nvidia had much higher penetration in the professional graphics cards market (~75%), compared to discrete desktop graphics (~75%), discrete notebook graphics (~70%).
Although there are about 17 times as many discrete graphics cards sold compared to the number of professional graphics cards sold, the professional graphics are on average sold at 6-8 times the price of a standard graphics card.
Expected Demise of Integrated Graphics
With the launch of hybrid CPUs like Intel's Sandy Bridge and AMD's Llano, the days of integrated graphic chips are numbered. Therefore we expect this business to phase out soon.
Growing Smartphone and Tablet market
While PC shipments have declined drastically in the last few years, mobile shipments (particularly smartphones and tablets) have grown at a robust rate. Though growth rate has slowed as developed markets near saturation, mobile shipments continue to expand at a fast pace.
IDC estimates the global tablet shipments to rise to cross 380 million units by 2017, compared to 117 million units in 2012.
Gartner estimates that more than 8 billion smartphones will be sold over the next five year period, through calendar 2018. The installed base will reach approximately 4.4 billion, representing the largest technology platform on which to innovate and drive upgrade opportunities.(Source)
Growth in The Internet-of-Things (IoT) Market
Gartner estimates the IoT market to grow almost 30 times, from an installed base of 0.9 billion in 2009 to 26 billion by 2020. It will result in $1.9 trillion in global economic value-add through sales into diverse end markets. (Link)
Wearable devices, clothing and accessories incorporating computer and advanced electronic technologies, is a subset of the IoT market and is considered to be the next big wave in computing. Juniper Research estimates the wearable computing device shipments to increase from 15 million units in 2013 to 150 million units by 2018. ABI Research forecast the figure to cross 450 million units during the same period. (Link)
Growth in the Automotive Segment
Specialty Analytics expects the market for Advanced Driver Assistance Systems to be worth around $15 billion by 2016, with a CAGR of 23%. (Link)
The automotive segment is the fastest growing sub-segment of Nvidia’s Tegra business and offers higher gross margins (compared to devices). The company 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 8 million cars using Nvidia’s technology at present, up from 4.7 million a year ago.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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