HTC’s Exclusion From Windows 8 Launch Has Little Impact On Nvidia’s Tegra Sales

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With reports of stock write-offs, declining profits and a sales target cut for Q2 2012, HTC is going through a difficult time. To add to the company’s misery, if buzz on the web is to be believed, the HTC’s first idea for a tablet running on Window 8 Operating System (OS) was turned down by Microsoft (NASDAQ:MSFT) earlier this month. Though a dominant player in the smartphone market, HTC has yet to make its mark in tablets with its first two models failing to garner the expected response last year. The company was expected to showcase its first quad-core tablet code-named “HTC Quattro”, based on Nvidia’s (NASDAQ:NVDA) Tegra 3 processors at the Mobile World Congress in February this year, but the same seems to have been further postponed.

Tegra division contributes close to 7% to our price estimate. However, we expect the same to become the most important division (in terms of revenue) for Nvidia by the end of our forecast period. But, could the ouster of HTC from Windows 8 launch significantly impact Nvidia’s future sales ? Here is why we feel that Nvidia has nothing to worry about.

See Our Complete Analysis for Nvidia Here

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HTC’s Omission From Windows 8 Is Not Permanent

Apparently, HTC has been denied the opportunity to release its first tablet running on the new Windows 8 platform because of a lack of experience in the tablet market combined with declining sales outlook for the company. Thus, for the initial roll-out of Windows RT for devices with ARM processors later this year, Microsoft has decided to work with other vendors that have greater sales volume and more tablet experience.

However, HTC and Microsoft have had a long standing relationship, with the first Windows based phone being manufactured by HTC. [1] With a total of seven Windows phone models shipping globally, it is clear that Microsoft intends to carry on with this relationship in future. Thus, we believe that the omission of HTC from Windows 8 will not be permanent and the company is expected to be allowed to develop a Windows 8 tablet during the second round of products sometime next year.

Product Wins From A Number of Tablet Manufacturers On Nvidia’s Plate

Nvidia is increasing focus to build its smartphone and tablet division, a segment that has already been cornered by Apple, Samsung and Qualcomm. However, it seems to be performing well in the tablet market so far with a number of design wins from Asus, Acer, Samsung, Sony, LG, Motorola and Toshiba amongst others.

Research firm IDC, estimates the global tablet shipment to have totaled around 69 million units in 2011 and forecasts the same to grow to 106 million in 2012. [2] We estimate HTC to account for a meager 1% share in the global tablet market. [3] In contrast to this, some of Nvidia’s other customers such as Samsung and Asus hold a much higher share – Samsung: 7.5% and Asus: 2.3%. [4]

Nvidia’s Tegra processors power a total of five tablets manufactured by Samsung and Asus; and thus we do not believe the possible failure of Tegra 3 powered HTC tablet to have any material impact on Nvidia’s revenue from its mobile computing division. On the contrary, we feel that the company is well positioned to capture a higher market share with its quad-core Tegra 3 processors.

Potential Impact

As mentioned above, HTC has a 1% share in the global tablet market. Assuming, that with the future launch of its quad-core tablet the market share remains the same and all three models contribute equally to the total revenue earned from tablet sales, we can assume the total shipment of HTC Quattro with Tegra 3 processors to be around 350 thousand units (1% * 106/3).

The average price for a Tegra 3 chip is around $20. [5] Even if we imagine a possible scenario where Nvidia loses out the entire 350 thousand units estimated sales of Tegra 3 processors this year, it will only lead to a $7 million (350 thousand * $20) decline in its estimated revenues. This, compared to our revenue forecast of above $800 million in 2012 will hardly impact the overall valuation for the company.

Our price estimate of $20.98 stands at a premium above 70% to the current market price.

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Notes:
  1. HTC Said To Be Shut Out Of Next Version of Windows, Bloomberg, June 7, 2012 []
  2. Media Tablet Shipments Outpace Fourth Quarter Targets; Strong Demand for New iPad and Other Forthcoming Products Leads To Increase in 2012 Forecast, IDC Press Release, March 13, 2012 []
  3. Weak sales keep HTC From launching first Windows 8 Tablet, phonearena.com, June 10, 2012 []
  4. iPad crushes other mobile PC and tablet manufacturers in market share, iMore, May 24, 2012 []
  5. Nvidia Tegra 3 Costs Between $15-$25, Softpedia, November 25, 2011 []