Nvidia (NASDAQ:NVDA) scored its first significant design win for the Icera 500 modem with Microsoft’s (NASDAQ:MSFT) 4G enabled version of the Surface 2 tablet, introduced earlier this week. Microsoft launched the Surface 2 tablet (powered by Nvidia’s Tegra 4 processor) in September last year. The Surface Windows RT, launched in June 2012, was powered by Nvidia’s Tegra 3 processor and failed to garner the expected response. However, to spur demand for the Windows RT platform , Microsoft completely revamped the Surface 2 tablet. The device is thinner, lighter and has a a longer-lasting battery compared to its predecessor. Though the Surface tablets are yet to make a significant penetration into the tablet market, it is an important technical win for Nvidia.
The addition of Surface 2 tablet further expands the list of devices powered by Nvidia’s modem technology, such as the Tegra NOTE 7 LTE tablet platform and smartphones with Tegra 4i, such as the LG G2 Mini and Wiko WAX.
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 pulled up the production of its Tegra 4i chips at the expense of its short-term revenue growth last year.
Nvidia’s Tegra processor revenues declined by 48% in fiscal 2014. While revenues declined significantly in the first half of the year, Nvidia registered 110% sequential growth in Tegra processor revenues in Q3 2014 as it saw a rising number of Tegra-4 powered devices hit the market. 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.
In addition to tablets and smartphones, the company 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-ones, clip-ons and smart monitors. Tegra 4 also powers Shield, Nvidia’s maiden attempt as a gaming hardware provider, which pitches it against console makers like Sony and Microsoft.
We forecast the Tegra processor revenue to grow by nearly 20% next year and cross $1 billion by the end of our review period.
Our price estimate of $17.17 for Nvidia is at a slight discount to the current market price.