Despite posting solid Q2 2013 earnings, Nvidia’s (NASDAQ:NVDA) stock has been treading a downward path since August 2012. Reaching a low of $12 in June this year, the stock recovered slightly before dropping to the same level this month. With roots in visual computing, Nvidia over the years has expanded into parallel computing and mobile computing, which we believe could be significant revenue drivers in the years ahead.
We think the decline is stock is more on account of adverse macro conditions as the company continues to have strong fundamentals. Robust revenue growth from Tegra, the growing adoption of the Kepler architecture, and a strong foothold in discrete graphics are factors that continue to drive Nvidia’s growth. The company will report its Q3 2013 earnings on November 8, and despite macro headwinds we expect it to post strong results this quarter. (Read Our Article: Nvidia Reaches $22 For These Three Reason)
Here are some key factors which we believe will drive Nvidia’s Q3 revenue.
Increase In Revenue From Tegra 3 Processors
Having made a focused push into mobile computing last year, Nvidia is eying the lucrative tablet market as a way of challenging Qualcomm’s (NASDAQ:QCOM) growing smartphone dominance. It positioned its standalone dual-core app processor, Tegra 2, well to capture significant non-iPad tablet market share in 2011 and some high profile design wins this year which is reminiscent of the growing success of Nvidia’s quad-core Tegra 3 processors.
The launch of Tegra 3 accelerated Nvidia’s growth in mobile computing. Hitting record sales in Q2 2013, Tegra 3 processors featured in a number of exciting devices this year – Google’s Nexus 7, the world’s first $199 quad-core 7-inch tablet; Microsoft’s Windows RT Surface tablet; Fujitsu’s ARROWS X, the world’s first quad-core LTE smartphone; and the World first RT device by Asus. Last month Nvidia scored another big win from HTC’s One X+ smartphone to be sold by AT&T, which makes AT&T the first US carrier to approve Nvidia’s Tegra 3 with 4G LTE for its network. (Read: Nvidia Takes On Qualcomm With Its 4G LTE Compatible Tegra Processors)
Additionally, we expect Nvidia to gain from the planned exit of Texas Instruments (NASDAQ:TXN) from the smartphone and tablet processor market. Nvidia plans to unveil its Tegra 4 processors, which are said to have faster graphics core and CPU compared to Tegra 3, at CES early 2013. We think this will further increase revenue contribution from this division. 
While Nvidia continues to face threats from Samsung and Qualcomm with its S4 line-up, we expect to see a significant increase in Tegra-related revenue in Q3 as well as in the coming quarters.
Positive Outlook For Products Based On Kepler Architecture
Nvidia launched its new Kepler GPU architecture, which is the first architecture to include virtualization technology built right into the GPU, in mid-March this year. The company claims that Kepler is its most efficient GPU architecture to date and expects the same to translate into more market share and higher margins. Starting with desktops and notebooks, Nvidia intends to roll out Kepler into all of its businesses. Apart from strong sales of Tegra processors, the introduction of Kepler architecture was the primary reason for 3% y-o-y and 13% q-o-q increases in Nvidia’s revenue in Q2 2012.
The introduction of Sandy Bridge and Llano APU processors by Intel and AMD, respectively, has put 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. We believe that with its high-end graphic performance, Nvidia will be able to retain its foothold in its core business of GPUs.
Last month Apple (NASDAQ:AAPL) refreshed its desktop offerings with Nvidia’s Kepler based discrete graphics solution.
We believe that strong growth in notebooks will continue in the coming quarters driven by Kepler design wins on the Ivy Bridge platform.
We will update our price estimate of $21.85 for Nvidia post the Q3 2013 earnings release.Notes: