Nvidia (NASDAQ:NVDA) has traditionally designed and developed discrete and integrated GPUs for notebooks, desktops and workstations. After its exit from the integrated graphics business with the introduction of APUs from Intel (NASDAQ:INTC) and AMD (NYSE:AMD), the company is looking at other avenues for revenue growth. And the most important growth driver at present is its expansion into the mobile computing market.
Currently, Tegra and other related products contribute close to 7% to our price estimate of $20.98. But we believe this division has the potential to become the largest revenue contributor by the end of our forecast period. (See: How Tegra Can Become Nvidia’s Most Valuable Segment) Here we highlight a few important factors that reinforce our positive outlook for Nvidia’s Tegra business.
Nvidia Riding High on Tegra3 Growth
After a successful 2011 with its dual-core Tegra2 processors, Nvidia introduced its Tegra3 processors which excel more than two times in speed and performance than Tegra2. Tegra3 is based on the company’s low-power quad-core architecture optimized for tablets and smartphones, and its launch marked a jump for Nvidia into the mobile computing bandwagon. While Tegra2 featured in 15 smartphones last year, Tegra3 is expected to power around 30 devices in 2012. It is believed to have by far the strongest software system for graphics in the mobile world. 
Amid a decline in its overall Q1 2012 earnings, the company posted a 21% rise in revenues from the consumer products portfolio. It witnessed an increase in Tegra related sales and expects to ship about 25 million Tegra processors in 2012, almost double its shipments in 2011. 
The growth in Tegra 3 sales reinforce the general belief that Nvidia is a dominant force in the tablet market and is expanding rapidly in the smartphone business globally. The world’s first Tegra 3 phone was launched in February by HTC, and other phone wins around the corner include ZTE with Tegra plus Icera phones, Fujitsu, LG and K-Touch.
Icera LTE Chips Approved to Run on AT&T’s 4G LTE Network
Last week Nvidia announced that its Icera 410 LTE modem chips for notebooks and tablets are officially approved to run on AT&T‘s (NYSE:T) 4G LTE network. This could give way to Icera-powered mobile devices as soon as this year. The move makes Nvidia one of the select few multimode LTE modems to have been approved for use on AT&T’s 4G networks, which could significantly broaden its mobile device market over the next few years.
The Icera 410 LTE chipset was added to Nvidia’s product lineup last year, with the acquisition of the UK-based baseband chip maker Icera. The deal gave Nvidia access to Icera’s more than 550 patents for 3G and 4G wireless modem components, positioning it to offer not only the chipsets that power smartphones and tablets but also their wireless connectivity capabilities as well.
In February this year, the company announced a new partnership with cellular silicon manufacturers GCT Semiconductor and Renesas Mobile that married 4G LTE modems with its Tegra3 chips.
Low Cost Kai Platform to Make Android Tablets Available at $199
Nvidia’s most recent milestone in mobile device computing was the introduction of Kai platform, which is expected to be launched later this year. The prototype Android tablet will be based on the Kai platform and will compete in the lower cost family of tablets. The Android device will be based on the company’s powerful Quad-core Tegra 3 chipset and Kai is intended to push the tablet price down to $199.
Additionally, the company along with Microsoft (NASDAQ:MSFT) is seeding hardware vendors to have its new chip into their laptops with the aim to build an ecosystem of applications before the launch of Windows 8. 
We estimate Nvidia’s revenue from mobile and game consoles will reach $0.8 billion by the end of this year, and more than double by the end of our forecast period. However, if the revenues go up to $3 billion, we can see an upside of 5% to our price estimate.
Our price estimate of $20.98 stands at a premium of 69% to the current market price.Notes:
- Nvidia shows massive Tegra3 launch growth, Slash Gear, May 24, 2012 [↩]
- Estimated Brisk Tegra3 Sales to Benefit Taiwan’s Contract Supplies, cens.com, Dec 21, 2011 [↩]
- Will Nvidia’s Kai Lead to Less Expensive Tablets?, Mobile Sports Report, May 24, 2012 [↩]