Nvidia (NASDAQ:NVDA) reported its Q4 2014 and full-year earnings on February 12. The Tegra tablet/smartphone processor product transition, along with declining PC shipments, negatively impacted Nvidia’s top line growth in the first half of fiscal 2014 (ended January 31). However, despite lower PC shipments, Nvidia’s leadership in visual computing, gaming and professional graphics, as well as its positive performance in data center, fueled growth in the latter part of the year.
Nvidia witnessed a 3.5% decline in its fiscal 2014 revenue as the strength in its high-end GeForce GPUs, Quadro, Tesla and Tegra for automotive products was partially offset by a decline in the desktop PC and notebook markets. The transition from the Tegra 3 to Tegra 4 generation, especially in the first half of the year, negatively impacted Nvidia’s 2014 revenue growth. The stronger-than-expected growth in GeForce, GTX, desktop and notebook GPU sales contributed to a 9% sequential and 3% annual increase in Nvidia’s Q4 2014 earnings. GAAP and non-GAAP gross margin reached record highs at 54.9% in fiscal 2014.
Nvidia claims to have started its fiscal 2015 with a 64% share of the PC discrete graphics market, 81% of workstation graphics units and Tesla in pilot projects at 44% of all HPC sites. ((Nvidia’s CEO Discusses F4Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014)) Strong sales of its high-end GPUs for PC gaming, increasing acceptance of the Kepler architecture in PCs, rising Tegra revenues, and deeper penetration in the data center, should all drive Nvidia’s future growth.
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Our price estimate of $16.42 for Nvidia is in line with the current market price. We are in the process of updating our valuation for the 2014 earnings.
High-End PC Gaming To Drive Nvidia’s Growth
Nvidia believes that the strong growth in high end-gaming was the primary reason that its Q4 2014 revenue came in well above its estimate. Led by desktops and notebook GPU sales, Nvidia’s GPU business was up 8% quarter over quarter and 14% year over year. On a year-over-year basis, the increase reflected approximately 50% growth in GeForce, GTX and GPU sales, as the products were well-positioned for the overall gaming market segment demand. GeForce business benefited from the launch of several graphically intensive games including Call of Duty: Ghosts, Assassin’s Creed IV: Black Flag and Batman Arkham Origins.
During the UBS Global Technology Conference in December 2013, Nvidia declared that the primary reason that it has managed to outpace the PC market is that it does not, and has not ever, addressed the bottom 70% of the market. Its main focus has been on those vertical segments within a broader computing market where visual computing matters the most, including gaming, PC gaming, professional visualization and design, high-performance computing, and big data analytics.
PC gaming represents almost 40% of the worldwide gaming market, which is higher than consoles, phones, tablets or any other individual gaming segment, and we believe it will continue to drive Nvidia’s GPU shipments.  The PC platform is the only open-platform for gaming and GeForce is very strong in that segment.
Tesla To Drive Growth In The High Performance Computing Market
The release of the Kepler-based GPUs last year has fueled Nvidia’s growth in professional graphics. While Quadro workstations witnessed a 4% increase in Q4 2014, Tesla for high performance computing was up more than 20% year over year. The company claims that the introduction of Kepler has translated into higher market share and margins for the company. Accounting for 80% of the market, Nvidia remains the dominant player in professional GPUs.
The growth in High Performance Computing is driving demand For Nvidia’s Tesla GPUs as Co-Processors or Accelerators in high performance systems. In the last year, the percentage of high performance computers with accelerators has almost doubled and Nvidia accounts for 85% of the increase.  The company has been investing in advanced computing and its own CUDA technologies for years and its business at the high end is at last gaining momentum.
Nvidia recently was showcased at a Supercomputing industry event with its Tesla GPUs in a Twitter Big Data analytics deployment. More notably, in December 2013, Nvidia announced that IBM will include Tesla accelerators in its its next generation supercomputers and will be developing accelerated versions of IBM enterprise software applications with Nvidia CUDA GPUs. IBM dominates the commercial end of the Supercomuting market. According to IDC, 32% of all HPC computing systems are IBM implementations. 
Additionally, Nvidia has launched the Tesla K40, which is the world’s fastest accelerator for Supercomputing and Big Data analytics. In fact, it is included in the world’s current number one supercomputer and will likely be included in future high-end systems now in development.
Targeting The Automotive Segment Will Expand Nvidia’s Addressable Market For Tegra
Nvidia’s Tegra processor business grew 18% sequentially in Q4 2014 led by higher volumes for Tegra mobile devices, primarily from Tegra 4 sales to Xiaomi for their M3 smartphones. Leveraging its Tegra processors to tap growth in mobile computing is a key long-term growth strategy for Nvidia. In order to better compete against Qualcomm (NASDAQ:QCOM), Nvidia also pulled-up the production of its Tegra 4i chips at the expense of its short term revenue growth last year.
In addition to tablets and smartphones, Nvidia’s core Tegra market also includes gaming set-top boxes, gaming smart TVs and automotive electronics. Nvidia claims that its automotive business has a $2 billion pipeline and it has already laid the foundation for the next generation of in-car electronics and advanced driver assistance.
Specialty Analytics expects the market for Advanced Driver Assistance Systems to be worth around $15 billion by 2016, with a CAGR of 23%.  Nvidia is in a strong position to leverage this growth. Its Tegra infotainment systems for the automotive market increased more than 60% year over year in Q4 2014. Nvidia is broadening its relationship with Audi, which plans to use the upcoming Tegra K1 chip in more of its cars.
Q1 2015 Outlook
- Revenue of $1.5 billion, +/- 2%.
- GAAP and non-GAAP gross margins of approximately 54.2% and 54.5% respectively.
- GAAP and non-GAAP operating expenses of $454 million and $413 million respectively.
- GAAP and non-GAAP tax rate of 20%, +/- 1%.Notes:
- Nvidia’s CEO Discusses F3Q 2014 Results – Earnings Call Transcript, Seeking Alpha, November 7, 2013 [↩]
- Nvdia’s Management Presents at UBS Global Technology Conference (Transcript), Seeking Alpha, November 22, 2013 [↩]
- Nvidia’s CEO Discusses F4Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 [↩] [↩]