Graphics and mobile chip maker Nvidia (NASDA:NVDA), is set to announce its Q1 2013 result on Friday. A slowdown in GPU sales due to the hard drive shortage, a decline in integrated GPU business, the economic crisis in Europe and a slowdown in the U.S. economy are some of the factors that contributed to Nvidia’s earnings taking a hit last quarter.
While new GPU products introduction by Intel (NASDAQ:INTC) and AMD (NYSE:AMD) pose a threat to Nvidia in the PC segment, the dominant presence of Qualcomm (NASDAQ:QCOM) challenges its success in the mobile and gaming console segments. However, Nvidia continues to hold its ground with a leadership in professional graphic products, the successful launch of Tegra3 and an entry in the PC microprocessor market on the cards. We analyze certain factors that affect the company and trends which could mark a good start for a promising year ahead.
Pressure from Professional Graphic Products by AMD and Intel
Nvidia has been enjoying a leading position in the professional graphic division for a long time, with a current market share of 84%. Contributing close to 30% to our price estimate, this is one area where Nvidia needs to stand its ground to defend its valuation. However, the introduction of new graphic products by Intel and AMD is giving the company a good reason to be nervous.
While Nvidia’s Quadro maintains leadership in professional graphics space, AMD and Intel are soon catching up. Intel, which never had a significant presence in the professional graphics processor market, is now providing support for professional applications like 3D CAD and basic digital content creation (DCC) through its Xeon processors based on Sandy Bridge architecture. AMD’s recent launch of its new FirePro SDI professional graphics cards, promise to provide more flexibility for SDI input and output capabilities and improve real time communication. 
Fierce competition among these three players might not see Nvidia reach the 88% market share that it previously enjoyed. However, owing to the growing opportunities in this space, we remain optimistic with the company’s prospects in this division and estimate it to hold its 83% of the market share through the end of the forecast period.
Growing Opportunities in the Mobile and Game Console Computing Space
With smartphones and tablets registering significant growth in 2011, amidst the slow semiconductor market, all players are vying for a larger share in this fast growing segment. Global smartphone shipments grew by 55% in Q4 of 2011, totaling 158 million units.  Gartner estimates that tablets have registered a growth of over 250% in 2011, and will continue to grow rapidly for next few years amounting to more than 320 million globally by 2015.
This past year, Nvidia began a focused push into mobile computing and showed ambitions of becoming much more than a graphics chip maker. After Tegra 2 failed to garner the expected response, Nvidia introduced Tegra 3, which accelerated its growth in this segment. The company expects to ship about 25 million Tegra processors in 2012, doubling its shipments from 2011. 
Despite intense competition faced from Apple, Qualcomm as well as other players like Broadcom (NASDAQ:BRCM) and Texas Instruments (NASDAQ:TXN), we believe that Tegra 3 will act as a catalyst to give the relevant push to Nvidia in the smartphone and tablet market, and could pull in revenues of up to $2 billion by the end of the forecast period.
Launch of APUs by Intel and AMD
Last year was marked with a significant transformation in the microprocessor business as Intel and AMD began offering Sandy Bridge and Llano APU processors respectively. These processors are a hybrid of a CPU and a GPU, and essentially make the requirement of integrated graphics chips and entry level graphics cards obsolete. As a result, Nvidia’s integrated graphics business began to see rapid declines in 2011, and we expect this business to vanish by the end of 2012.
However, the discrete GPU business of Nvidia has not been affected with the launch of APU’s, as some PC buyers still prefer to have a discrete GPU and not completely rely on graphics capability of Sandy Bridge and Llano APUs. The fact that Nvidia recently won several design deals for Intel’s Ivy Bridge platform scheduled for 2013 also send a positive signal.
We continue to believe that the market fails to assign a fair value to the stock and keeping in mind future opportunities that lie ahead of the company, we stick to our current price estimate of Nvidia at $21.26, a premium of almost 65% to the current market price.Notes:
- AMD launches new professional graphics cards, Fudzilla, Sept 14, 2011 [↩]
- Global Smartphone Shipments Jump 55%, Led by Apple’s IPhone, Bloomberg Businessweek, Feb 6 2012 [↩]
- Estimated Brisk Tegra 3 Sales to Benefit Taiwan’s Contract Suppliers, cens.com, Dec 21 2011 [↩]