Nvidia’s Q1 Earnings: Tegra3 and Kepler GPU’s Promise a Better 2012

The hard drive shortage and the consequent higher prices negatively impacted Nvidia’s (NASDAQ:NVDA) GPU sales in the last quarter of 2011. As expected, the company continued to face headwinds from the soft economy and the high hard drive prices, with a sequential decline in its revenues to $925 million. With its competitors  Intel (NASDAQ:INTC) and AMD (NYSE:AMD) suffering a similar fate in the 1^st quarter of 2012, we feel there is not much to worry about as Nvidia’s fundamentals are strong enough to support a strong valuation. We remain bullish on this year’s outlook, mainly on account of the following factors. 

See our complete analysis for Nvidia here

Growing Opportunities in Smartphones & Tablets with Tegra3 Processors

Last quarter, Nvidia’s Tegra 2 business suffered a sequential decline as manufacturers held back orders to include the next generation quad-core Tegra 3 mobile processors. As expected, Tegra3 acted as a catalyst, with revenues in Q1 2012 growing by almost 21%.

The world’s first Tegra 3 phone was launched in February by HTC, and other phone wins around the corner includes- ZTE with the first Tegra plus Icera phones, Fujitsu, LG and K-Touch. Nvidia expects to ship about 25 million Tegra processors in 2012, doubling its shipments from 2011. ^[1]

Another driver for this segment is windows on ARM. Progress continued this quarter with Microsoft shipping development PCs powered by NVIDIA’s Tegra 3 mobile processor to Windows 8 developers and device makers.

Fueled by surging growth in smartphone and tablet markets, the company is ramping up production of its Tegra 3 processors; the revenue from which we believe will reach $0.8 billion by end of this year and more than double by the end of our forecast period.

Strength of New Kepler GPU’s and Consequent Growth in Notebooks

Nvidia launched its new Kepler GPU architecture in mid March this year. The first Kepler product was the GeForce GTX 680, which is 10% faster, 20% smaller and 22% more power efficient than its direct competitor. It is also the first architecture to include virtualization technology built right into the GPU.

The company claims that Kepler is the most efficient GPU architecture ever created by them and expects it to translate into more market share and higher margins. More recently the company launched its GeForce GTX 690 and GTX 670 versions, which we feel might have a positive impact on the ongoing quarter results.

As Tegra 3 utilizes a specially enhanced 40-nanometer process, the available 28-nanometer wafers can be allocated for Kepler production and thus the company is confident that the ongoing shortage of 28-nanometer wafers will not come in its way in meeting the growing end demand. Starting with desktops and notebooks, it intends to roll out Kepler into each and every one of its businesses.

The company refreshed its notebook GPUs top to bottom with the launch of the GeForce 600M series and consequently witnessed a growth in this division. We believe the strong growth in notebooks will continue in the next quarter as well, driven by Kepler design wins on the Ivy Bridge platform.

What’s in Store Ahead

Strength of the new Kepler GPUs will fuel growth in the desktop and notebook divisions. With a combined contribution of 33% to our price estimate, these are two of the most important division in Nvidia’s portfolio.

As the server and workstation market refreshes with Intel’s new server chips, Nvidia will push out its professional GPUs in the market and therefore expects another stellar year. Nvidia remains the market leader in this division and the business constitutes about 30% to company’s value.

Lastly, with new Tegra 3 phone wins, we can expect the company to ride high on the smartphone and tablets growth rate and believe that this division will generate higher revenues in 2012 for Nvidia. According to our model, the mobile and game console division contributes a little over 7% to the price estimate for Nvidia.

We are in the process of updating our model with the current earnings.

Presently, our price estimate for the company stands at $21.26, a premium of 61% to the current market price.

See our complete analysis for Nvidia’s stock.

1. Estimated Brisk Tegra 3 Sales to Benefit Taiwan’s Contract Suppliers, cens.com, Dec 21 2011 [↩]