Earlier this month, Nvidia (NASDAQ:NVDA) forayed into space research with the Indian Space Research Organization (ISRO) by choosing its Tesla GPUs to enhance the capabilities of the satellite launch vehicle. The SAGA Systems, India’s most powerful supercomputer ranking 85th on the Top 500 list, will be powered by Nvidia’s Tesla GPUs. The system is used to handle complex aeronautical problems and the GPUs enable the ISRO to reduce the time to create, simulate and verify a new launch vehicle design from weeks to days, while significantly enhancing the design quality and durability. The improved supercomputing power refines and enhances prediction capabilities while requiring a much lower investment in communication infrastructure.
Nvidia’s high-performance computing Tesla products, together with the success of Quadro product series, have been instrumental in fueling its growth in professional graphics division.
The professional graphics division contributed above 20% to Nvidia’s revenue in 2011 and constitutes around 30% of our current price estimate of $21. However, the company derives close to 80% and 15% of its revenue from the PC segment and Tegra products, respectively, and these two divisions together contribute close to 46% to our price estimate.
While AMD (NYSE:AMD) remains Nvidia’s only core competitor in professional graphics, the latter faces intense competition in the PC segment from established players such as Intel (NASDAQ:INTC) and AMD. Nvidia’s entry into new businesses and increased focus on the lucrative smartphone and tablet market with its Tegra line-up pitches it against heavyweights such as Qualcomm (NASDAQ:QCOM) and Texas Instruments (NYSE:TXN).
While we believe that the revenue contribution from PC and professional graphic divisions will decline through our review period, we firmly believe that Tegra has the potential to become Nvidia’s most valuable segment by the end of our forecast period. (Read: Tegra Could Become Nvidia’s Most Valuable Business)
Thus, while diversifying from its core business is a good move by Nvidia, we believe that investors should focus on the company’s strategy in the other two markets, namely smartphones and tablets, as any change in either of the markets is likely to have a significant impact on Nvidia’s future valuation.
We have a price estimate of $20.98 for Nvidia, a premium of around 60% to the current market price.