Nvidia Q3’15 Performance To be Driven By PC Gaming, Tegra Processors & Data Centers

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Graphics processors manufacturer, Nvidia (NASDAQ:NVDA) will report its Q3 2015 earnings on November 6th. The company reported a 3.5% decline in its fiscal 2014 revenue as strength in its high-end  products (including its GeForce GPUs and Quadro, Tesla and Tegra processors) was partially offset by a decline in the desktop PC and notebook markets. Nvidia regained its growth momentum in fiscal 2015, witnessing a 14.2% and 51.7% growth in revenue and net income, respectively, in the first half of fiscal 2015 (compared to the same period last year). The company expects to report revenue of $1.2 billion (+/-2%) in Q3 2015, with sequential growth being driven by continued strength in PC gaming and mobile platforms, datacenter and cloud solutions, and automobiles.

Nvidia remains focused on addressing the top 30% of the market, mainly those vertical segments within a broader computing market where visual computing matters the most. These include PC gaming, professional visualization and design, high-performance computing (HPC) and big data analytics. This focus has helped it outpace the PC market, where it has always had a significant exposure.

Our price estimate of $18.83 for Nvidia is slightly below the current market price. We will update our valuation after the Q3 2015 earnings release.

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See our complete analysis for Nvidia

High-End PC Gaming Remains an Important Growth Driver

Growth in Nvidia’s GeForce GPUs for gaming desktops and notebooks is being driven by its continued strength in the gaming market, including the recently released GeForce GTX 750 and GTX 750 Ti, as well as the Maxwell-based GPUs. PC gaming represents almost 40% of the worldwide gaming market, which is higher than consoles, phones, tablets or any other individual gaming segment. [1] GeForce sits at the center of the PC gaming ecosystem, now powering close to 100 million gaming PCs around the world. Nvidia claims that its new entry-level GeForce GTX GPU delivers the performance of the latest generation consoles, making the GeForce gaming PC the largest target for developers of latest generation games. [2]

Notebook gaming has grown at a CAGR of 51% in the last three years and Nvidia believes that the launch of new games this year will further drive growth for its GPUs. The industry is expanding both in terms of unit volume, as well as ASPs, as the production value of games continue to grow.

Rising Tegra Adoption Across Devices

Reporting 200% annual growth, Nvidia reported its fourth consecutive quarter of growth in Tegra revenue in Q2 2015. The company witnessed 110%, 18% and 14% sequential growth in Tegra processor revenues in Q3 2014, Q4 2014 and Q1 2015, respectively. Nvidia anticipates Tegra revenue to continue increasing, driven by three key high growth applications:  mobile devices, automotive electronics and gaming.

Nvidia scored its first significant design win in March 2014 for the Icera 500 modem with Microsoft’s (NASDAQ:MSFT) 4G enabled version of the Surface 2 tablet. The addition of the Surface 2 tablet further expands the list of devices powered by Nvidia’s modem technology, including the Tegra NOTE 7 LTE tablet platform. It has wins as well in smartphones with the Tegra 4i, including the LG G2 Mini and Wiko WAX. In May 2014, Xiaomi, China’s biggest electronics company, introduced its first tablet (MiPad) based on Nvidia’s K1 mobile processor.

Though the mobile device segment is the largest sub-segment in the Tegra division, the automotive segment is the fastest growing and offers higher gross margins (compared to devices). Automotive electronics is a large market and it is going through a transition  as cars have increased computing capability in both the drive train and the dashboard. Increasingly,  dashboard functionality within cars (infotainment system, digital cluster and automatic driver assistance) are being computerized. Nvidia  has been working on building its automotive computing platform for over a decade and is in a strong position to take advantage of this growth. At present, there are more than 6 million cars using NVIDIA processors on the road, and the company expects another 25 million processors to be integrated into vehicles over the next 5 years. [3]

Nvidia also aims to focus on developing the Android gaming market, which the company believes will become the world’s largest gaming platforms over time. Nvidia intends to leverage the capability and expertise it has developed in the PC industry in the last 15 to 20 years for the Android gaming market. At present, there are over 400 games optimized for both touch and the controller on Tegra and more and more are leveraging the power of Tegra K1. [4]

Tesla & GRID To Drive Growth In Data Centers

Nvidia’s data center strategy has two key components:  Tesla GPU computing and GRID virtualization. It expects both platforms to accelerate its growth in the future. Tesla and GRID generate increasing revenue from compute acceleration opportunities, VDI (i.e., virtual desktop infrastructure) deployments and streaming gaming (i.e., gaming on-demand), which has helped Nvidia expand its footprint in data centers.

The release of the Kepler-based GPUs last year has fueled Nvidia’s growth in professional graphics and translated into higher market share and margins for the company. Accounting for approximately 80% of the market, Nvidia remains the dominant player in professional GPUs. The company 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. [5]

Nvidia claims that the GRID trials continue to grow rapidly with nearly 600 enterprises worldwide evaluating the GPU server platform, up over 35% a few quarters back. Many of the trials announced are turning into sizable pilots and many of those are in big blue chip and government accounts.

High performance computing has driven Tesla so far and Nvidia expects big data analytics to further add to the growth momentum in the future. With IBM, Dell and HP now selling Nvidia GPUs in their high-volume servers, the company expects large-scale data centers to be a significant source of growth.

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NVIDIA just announced that the 32GB LTE variant of the Shield is now available for pre-order. $399 buys the unlocked LTE tablet in its own right, but NVIDIA tells us that AT&T will be offering it for $299 on contract.
Notes:
  1. Nvidia’s CEO Discusses F3Q 2014 Results – Earnings Call Transcript, Seeking Alpha, November 7, 2013 []
  2. Nvidia’s (NVDA) CEO Jen-Hsun Huang on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, August 7, 2015 []
  3. Nvidia Powers New Honda Infotainment System, Nvidia Newsroom, October 1, 2014 []
  4. Nvidia’s (NVDA) CEO Jen-Hsun Huang on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, August 7, 2014 []
  5. Nvidia’s CEO Discusses F4Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 []