Earlier this week, Nvidia (NASDAQ:NVDA) introduced its much anticipated Tegra 4 processor, which not only offers six times the GPU horsepower of Tegra 3, but unlike its predecessor, is also LTE compatible. With an optional chipset, an Icera i500 processor, Tegra 4 offers worldwide 4G LTE voice and data support.
With the success of Tegra 3, the world’s first quad-core processor, Nvidia made a deeper foray into the tablet market in 2012, with significant design wins like Google’s Nexus 7, Microsoft’s Windows RT Surface tablet, World first RT device by Asus, etc. However, the company’s progress in the smartphone market remained more or less stable.
4G/LTE is the future of wireless connectivity for mobile devices, especially smartphones. While Qualcomm (NASDAQ:QCOM) remains a big threat, we believe that the LTE compatible chipset will better equip Nvidia to challenge Qualcomm’s growing dominance in smartphones, helping it increase its penetration in the market.
Nvidia’s Tegra processor business registered approximately 50% y-o-y growth in 2012, and we expect the business to grow at a rapid pace in the future as well. However, the increasing competition in the market and negative operating margins could serve as potential roadblocks for Nvidia’s growth in mobile computing.
Tegra 4 is the world’s first quad-core processor based on Cortex A15, ARM’s most advanced CPU core. The chip delivers a more realistic gaming experience, new camera capabilities through computational photography, faster web browsing and higher resolution displays. In addition, Nvidia claims that Tegra 4 consumes 45% less power than the Tegra 3 processor.
Qualcomm’s Snapdragon Lineup Increases Competition
Dominating the production of LTE chipsets, Qualcomm continues to lead the smartphone market. The LTE leadership has allowed Qualcomm to command majority of the smartphone market. For example, Samsung’s Galaxy S III and HTC’s One X series had to be launched in the U.S. with a Snapdragon core, since rival chipsets did not play well with Qualcomm’s LTE basebands.
Aditionally, with Qualcomm coming up with its own quad-core chipsets, Nvidia’s advantage of offering the world’s first quad-core processor might not sustain for long. While Nvidia expected to ship around 30 million Tegra processors in 2012, Qualcomm shipped 141 million chipsets in its fiscal Q4 2012 alone. 
Though the LTE compatibility will fuel Nvidia’s growth in the smartphone market, the introduction of new Snapdragon processors by Qualcomm at the ongoing CES 2013, will step up competition for the company. Qualcomm claims to have already bagged a significant number of design wins for mid-range and high end smartphones and tablets, powered by its Snapdragon 800 and Snapdragon 600 processors. The new Snapdragon lineup, which will be available in commercial devices by mid-2013, are estimated to deliver as high as 40% improved performance compared to Qualcomm’s S4 Pro processor.
Low Operating Margins
Operating margins from Nvidia’s Tegra business have remained negative since 2008. The company is relatively new to this business, and has still not established a wide enough sales base to be profitable. Additionally, the intense competition in the market puts a pressure on the operating margins.
Mobile computing remains a highly crowded market with every chipmaker vying to mark its entry in the same. In addition to Qualcomm, Nvidia faces competition from leading handset manufacturers – Apple (NASDAQ:AAPL) and Samsung – who design their own chips in-house, and could end up selling them to other device manufacturers in the future.
Apart from other competitors such as Marvell and MediaTek, who recently unveiled its first quad-core chipset, Intel’s (NASDAQ:INTC) increasing efforts to branch out in the application processor market in light of the global PC slowdown is proof enough that competition is only going to increase in the future.
However, as Nvidia ramps up production volumes of its Tegra chips, we expect it to increase its profit margins for mobile phone graphics. Higher volumes, both from the tablets and smartphone market will yield improved utilization levels, which in turn would increase profit margins.
Our price estimate of $19.54 for Nvidia marks our valuation at a significant premium over the current market price.Notes:
- Nvidia still has a lot to prove in the mobile market, CNET, November 9, 2012 [↩]