Our price estimate for Nvidia stands at $21.26 implies a premium of about 40% to the current market price. In the past, we wrote on several growth catalysts for Nvidia, including the future growth in mobile computing, continued strong sales of discrete GPUs despite the launch of Intel’s Sandy Bridge and AMD‘s Llano hybrid chips as well as its recent entry into the PC microprocessor market. Here we show one example on how the market could be undervaluing Nvidia’s business.
The current market capitalization for Nvidia is around $9.2 billion. Its last known net cash balance was $3.1 billion when it reported its Q4 2011 and full year earnings. If we exclude this cash, it appears that the market is valuing the company’s business at around $6.1 billion.
We consider Nvidia’s professional GPU business first as this is well known.
This business has consistently performed well over the past few years even though the company’s remaining businesses have fluctuated. For the past three years, the free cash flow from its professional GPU business has constituted on average 50% of Nvidia’s total unlevered free cash flows. Going forward, this proportion will decline as profits from its discrete PC GPUs and mobile computing pick up.
Nevertheless, it is fair to assume that the professional GPU business will continue to account for roughly 30% to 40% of total free cash flows even a few years down the line. Among other drivers, an improving economy will help drive enterprise demand. We value this business at around $3.9 billion with what we view as a conservative forecast.
If we assume that the market roughly agrees with the value of this business at somewhere near $3.9 billion, this leaves us with around $2.2 billion in market value to attribute to Nvidia’s discrete desktop GPUs, discrete notebook GPUs, mobile computing products (Tegra) and future PC CPUs businesses. Is this fair?
Revenues from these businesses combined amounted to more than $3.1 billion in 2011 alone. Given the rapid growth in Tegra, the sustained business in discrete GPUs and future additions of PC CPU sales, these revenues can reach more than $4.5 billion by 2015. We expect the profit margins (measured by EBITDA) to range from 20-30% for the GPU and PC businesses and mid-teens for the mobile chips.
As we look closely at these figures, we believe there is a disconnect between the earnings power of these businesses and the value the market is assigning to them. We value these remaining segments at close to $5 billion while the market is carrying the value at less than half of this estimate.