Nvidia (NASDAQ:NVDA) awakened the world to computer graphics when it invented the GPU in 1999. From its roots in visual computing, the company over the years has expanded into parallel computing and mobile computing. Today its processors power a broad range of products from smartphones and tablets to supercomputers.
Nvidia’s stock has lost over 25% of its value in the past four months though it has started to recover, and we feel that the current market price gives the company a valuation hard to ignore. Our price estimate of $20.98 for the company stands at a premium of almost 50% to the current market price. Here, we discuss certain trends that back our valuation for Nvidia.
Mobile computing is a fast growing market and Nvidia moved into this space earlier than some of its competitors. According to research firm Gartner, the worldwide mobile device sales to end users stood at 1.8 billion units in 2011, an 11.1% increase from 2010. It expects the overall market to grow by about 7% in 2012, mainly fueled by growth in smartphones and tablets. 
Nvidia has made significant progress in mobile computing so far this year. Its Tegra 3 revenues increased by almost 50% in Q1 2012, and the company looks determined to continue the pace for the rest of the year. With the introduction of the Kai platform specifically designed to bring down prices of Android tablets, unveiling the world’s first Windows RT tablet, powered by its Tegra 3 quad-core processors at Computex 2012 (Read Our Article: Nvidia Takes On The Mobile Market With World’s First Windows RT Device) and more recently confirming that its Tegra chips will power Microsoft’s new surface PC tablet – Nvidia has been eying the lucrative tablet market as a way of challenging Qualcomm’s (NASDAQ:QCOM) growing smartphone dominance.
The rising smartphone adoption and growing tablet sales will lead to more graphics usage from mobile gaming, mobile video, and mobile Internet. We expect this industry trend to be favorable to Nvidia’s mobile computing business in the long run. Keeping in mind the company’s continued efforts to expand in this space, we expect Tegra related revenues to cross the $2 billion mark by the end of our forecast period.
Increased Competition from AMD & Intel in the GPU Segment
The introduction of new graphic products in the market by Intel (NASDAQ:INTC) and AMD (NYSE:AMD) has threatened Nvidia’s dominance in the GPU market. We believe, that though the increased competition could eat away some of Nvidia’s current market share in professional graphics; the company will retain its leadership with a market share of above 80% till the end of our forecast period.
The introduction of Sandy Bridge and Llano APU processors by Intel and AMD respectively, has put the integrated graphics chips and entry level graphics cards in jeopardy. Though they threaten the discrete GPU business of Nvidia, this division does not seem to have been affected as drastically as the integrated chipsets segment.
Recently, Apple announced that its new line of MacBook Pro will switch back to Nvidia graphics, reinforcing our belief that the company will retain a dominant share in the discrete desktop and notebook markets for the period in review. AMD remain the main rival for Nvidia in this segment, and we believe that the neck to neck competition between the two will make market share gains for either player unsustainable over the long-run.
Expected Entry in the PC Microprocessor Market
The estimated revenue stream from Nvidia’s expected entry in the PC microprocessor segment, contribute close to 5% to our current price estimate for the company. Nvidia is developing ARM-architecture based CPUs (code-named Project Denver), which could challenge the x86 CPU architecture that currently dominates the desktop, notebook and server CPU markets. Nvidia’s ARM-based CPUs are expected to come to market in 2013 and if successful, could be an industry disrupting move by the company.
Even though the PC sales might be falling off the cliff in the developed world, the strong growth in emerging markets is expected to drive growth in worldwide sales. Additionally, growth in cloud computing and server virtualization/ consolidation will act as additional catalysts for the rise in global PC & server microprocessor shipments.
We see Nvidia’s share in the PC microprocessor market reaching 1.6%, by the end of our forecast period.
Key Risks: PC Microprocessor Failure, Pricing Pressure, Insufficient Revenues from Tegra
One of the primary risks to our price estimate is the failure of project Denver. If the project does not take off in 2013 or fails to reach the expected market share of 1.6% by the end of our forecast period, we could see some downside to our price estimate.
Although, we have assumed a stability in the price of professional as well as discrete desktop and notebook GPU’s over time, there is a possibility that the price may not rise as much as expected in the current year and might see a slight decline next year onwards. With PC growth coming from emerging markets, AMD is likely to resort to some price competition in order to gain a stronger foothold. To retain its market share, Nvidia might resort to price cuts in future. If there is a 10% decline in our estimated average GPU price, we could see another 5% downside to our price estimate.
Lastly, if the expected growth in revenue from Tegra3 sales does not come about as expected, we could see a significant downside to our current price estimate of $20.98.Notes:
- Gartner Says Worldwide Smartphone Sales Soared in Fourth Quarter of 2011 With 47 Percent Growth, Gartner Press Release, February 15, 2012 [↩]