The introduction of Sandy Bridge and Llano from Intel (NASDAQ:INTC) and AMD (NYSE:AMD), respectively, has forced Nvidia (NASDAQ:NVDA) to exit its integrated graphics chipsets business, which once earned significant revenues for the company. For 2009, the revenues from integrated graphics stood at around $872 million. We estimate that these revenues fell below $400 million for 2011, and 2012 could see a complete exit.
Sandy Bridge and Llanos are accelerated processor units (APUs) which are essentially a hybrid of a CPU and a GPU. APUs make the function of integrated graphics redundant and, in fact, provide better performance in comparison. However, the impact of these APUs could extend well beyond the above. If future advancements from Intel and AMD result in much better graphics performance, these APUs could threaten Nvidia’s discrete GPU business for notebook and desktop segments.
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In order to understand the magnitude of the impact, we have to take a look at how discrete GPU shipments can shape up. In the case of desktops, the number of discrete desktop GPUs sold as a proportion of desktops shipments has come down from an estimated 62% in 2007 to about 47% in 2011. We forecast stable levels in the future but if APUs threaten this business, this figure could continue to go down. Let’s assume a pessimistic scenario for Nvidia where this figure drops to 35% by the end of our forecast period. This implies that only 35% of the desktop users will be using discrete GPUs in 2018.
If we look at the equivalent figure for notebooks under a similar conservative scenario, we find that APUs can force discrete notebook GPUs sold as as proportion of notebook shipments to stay around the current levels of 33% and not grow as we currently expect it to.
The above two scenarios imply a significantly reduced market growth with discrete GPU shipments growing by a mere 10% over the course of 7 years. This could lead to close to 10% downside to our price estimate for Nvidia.
Our price estimate for Nvidia stands at $21.19, implying a premium of about 40% to the market price.