Nvidia (NASDAQ:NVDA), which designs and develops GPUs, will announce its Q3 2014 earnings on November 7. Declining PC shipments and lower Tegra sales put pressure on the company’s top line growth in the first half of 2013. Nevertheless, Nvidia witnessed strong demand in the high-end segments of its GPU business across desktops, workstations and servers which led to a marginal sequential growth in Q2 2014.
With its leadership in visual computing, Nvidia expects to see stable growth in its GPU business for the rest of the year. While the drastic decline in Tegra revenues was a strong headwind for Nvidia in the first two quarters of fiscal 2014, the company expects to see significant growth in Tegra processors in for the remaining two quarters and beyond.
We expect Nvidia’s growth to accelerate in the latter part of 2013. Strong sales of its high-end GPUs for PC gaming, increasing acceptance of the Kepler architecture in PCs and beyond, the introduction of Shield and its next generation Tegra mobile processor are some key factors that reiterate our belief in Nvidia’s long term growth potential.
Our price estimate of $15.89 for Nvidia is almost in line with the current market price of $15.21. We will update our valuation after the Q3 2014 earnings release.
Tegra Processor Revenues To Accelerate In The Second Half Of 2013
Nvidia’s Tegra processor revenues declined significantly in the first half of 2013. Much of the decline can be attributed to the ramp down of Tegra 3 products and the company’s conscious decision to delay the launch of Tegra 4 by one quarter, in order to pull up the production of Tegra 4i chips. However, with Tegra 4 devices (including Shield) and Tegra 4i certification underway (expected in Q3), Nvidia expects to see significant growth in Tegra processors in the second half of the year and beyond.
Nvidia significantly expanded its line of Tegra-4 powered devices last month. It launched the first phone (Xiaomi Mi3) based on its Tegra 4 processor, and after much speculation finally introduced its Tegra Note, a reference platform for Android based tablets. A few weeks later, Nvidia boasted yet another product win by announcing that Microsoft’s (NASDAQ:MSFT) next-generation Surface 2 tablet will be powered by its Tegra 4 processor. The company has also received Tegra 4 orders for HP (NASDAQ:HPQ), Asustek and Toshiba devices.
With Tegra 4, Nvidia also aims to expand its reach to other large markets where visual computing matters, such as auto navigation systems, TV set-top boxes and new desktop form factors like all-in-one and smart monitors. Additionally, the company has started sampling its next generation mobile processor, code-named Logan, based on the Kepler architecture. It promises that the new mobile graphics processor will be more powerful than the PS3 and offers around three times the performance of the iPad 4 GPU.
Growing Strength In The GPU Segment Attributed To Gaming, Workstations, Quadro and Tesla GPUs
Despite efforts to expand operations in alternate growth markets, Nvidia still derives a majority of its revenues from the PC market and is impacted by declining PC shipments. PC sales dropped marginally in 2012, and research firm IDC estimates the downward trend to continue this year as well. However, Nvidia’s growing presence in the specialty PC market – gaming PCs, workstation PCs and high performance computing PCs – somewhat insulates it from the declining trend in the mainstream PC market.
Nvidia sells its PC graphics to two key segments – PC Original Equipment Manufacturers (OEMs) and gaming enthusiasts – to generate realistic and interactive graphics on PCs. While PC shipments to OEMs have slowed, the robust PC gaming market contributed to higher GPU shipments in 2012 and the positive trend continued in the first half of 2013 as well.
Driven by the release of new Kepler-based GPUs, Nvidia’s GPU business marked an 8% y-o-y growth in Q2 2014. Kepler is Nvidia’s most efficient GPU architecture to date, and is now available top to bottom for workstations and servers. It claims that the introduction of Kepler has translated into higher market share and margins for the company.
Q2 2013 was the strongest quarter for Tesla which was driven by application based deals as customers using off-the-shelf applications turned to Tesla to accelerate them. Quadro also marked strong growth in the quarter as Nvidia launched the Quadro K6000 to complete its Kepler lineup.
Sales of specialty PCs like gaming systems and workstations continue to grow. PC gaming helped increase Nvidia’s GPU revenues and drive margin growth last quarter, and we can expect the trend to continue for the rest of the year, as gamers prepare their systems for a number of games coming this fall.
Nvidia believes that open platforms such as PCs and Android are outgrowing the traditional console market. The PC game revenues is expected to reach $20 billion annually by 2015, whereas the total for both PlayStations will be less than $10 billion.  The PC gaming software market is expected to increase from $17 billion in 2012 to over $20 billion by 2015.  Since Nvidia’s GeForce is the gamers’ choice of GPUs by a margin of almost 2:1, we expect the company to benefit from the above trend. Notes:
- Nvidia’s CEO Discusses F2Q 2014 Results – Earnings Call Transcript, Seeking Alpha, August 8, 2013 [↩]
- Nvidia’s CEO Discusses F1Q 2014 Results – Earnings Call Transcript, Seeking Alpha, May 9, 2013 [↩]
- Nvidia Corporation’s CEO Discusses F4Q13 Results – Earnings Call Transcript, Seeking Alpha, February 13, 2013 [↩]