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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:
Pro Graphics cards
Nvidia's share in Professional Graphics Cards: We currently forecast Nvidia's market share to decline from an 74% in 2014 to 70.5% by the end of the Trefis forecast period. There will be a marginal downside to our price estimate if the market share were to fall down to 60% by the end of the forecast period.
Professional Graphics Cards EBITDA Margin: We currently forecast this figure to remain around the current level for the rest of our review period. There will be a marginal downside to our price estimate if margins for professional graphics cards were to decline to 20%. This could happen if AMD gains significant market share and remains highly competitive on pricing.
Mobile and Game Console Computing
Mobile & Game Console Computing Chips Revenue: We currently forecast this figure to increase from $398 million in 2013 to approximately $1.6 billion by the end of the Trefis forecast period. However, there could be a slight downside to our price estimate if Nvidia's successor chips under the Tegra series fail to make an impact and competitors such as Apple and Qualcomm along with new entrants such as Intel take the market share.
- Mobile & Game Console Computing Chips EBITDA Margin: We currently forecast this figure to cross 25% our review period. There will be a marginal upside to our estimate if margins reach crosses 30%.
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 Integrated GPUs, which were once found in the majority of PCs, have been replaced by Intel and AMD's APUs.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.
Nvidia also designs and develops mobile processor for use in smartphones and tablets. Nvidia's Tegra processor has seen significant revenue growth in 2011 and 2012. Mobile computing could become a big business for Nvidia in the future. The company also introduced its own handheld gaming device (Shield) this year.
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 (~80%), compared to discrete desktop graphics (~60%), discrete notebook graphics (~50%).
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.
Shift from Desktops to Notebooks
The shift of consumer preference from desktops to laptops will continue as the performance and pricing gap between desktops and laptops narrows. We expect the desktop market to more or less stagnate while notebooks will continue to grow, driven by demand from emerging markets.
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 by this year end.
Growing smartphone and tablet market
Smartphone sales have increased from about 139 million in 2008 to an estimated 675 million in 2012, (as per estimates from market research firm Gartner), an increase of 43% compared to 2011. We expect smartphones shipments to continue rising, crossing 1.3 billion by 2016.
Tablets are growing at a fast pace and are expected to cannibalize some PC sales in the future. Tablet shipments increased from 71 million in 2011 to 117 million in 2012 and are expected to reach 260 million by 2016.
Trefis Forecast Rationale for Professional Graphics EBITDA Margin
Earnings before interest, taxes, depreciation and amortization (EBITDA) are profits after factoring in typical expenses, such as cost of goods and services sold, SG&A Expenses, and R&D Expenses. EBITDA margin represents divisional EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-cash charges such as stock-based compensation expenses.
Nvidia's EBITDA margin has recovered a great deal from its significant drop in 2008. The drop in 2008 was driven by decline in average prices and negative impact of inventory reserves. We expect margins to stay around the current level for the rest of our forecast period.
Trefis considered the following two factors for its forecast:
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- Productivity gains
- Nvidia's introduction of the 28nm process is likely to aid margins going forward.
We expect Nvidia to maintain its gross margins as it sells more higher-end professional cards
- Nvidia's initiative of all-in-one workstation with HP and introduction of Maximus technology are targeted at a segment of professionals who can pay higher prices but not compromise on performance. The adoption of these technologies and products could improve margins.
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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