Leading GPU processor developer, Nvidia (NASDAQ:NVDA) will report its Q1 2016 earnings on May 7th. The company closed its fiscal 2015 (ended January 2015) on a strong note, driven by its increasing strength in gaming, data center computing, the cloud and the automotive electronics. In addition to beating its Q4 2014 guidance, Nvidia’s Q1 2016 revenue outlook was slightly above the consensus estimates. For Q1 2016 (which is a seasonally down quarter), Nvidia expects to report revenues of $1.16 billion, +/- 2%.
Nvidia’s focus on addressing the top 30% of the market (mainly those vertical segments where visual computing matters the most) is clearly paying off and has helped it outpace the PC market (where it has always had a significant exposure). A decade back, PC original equipment manufacturers (OEMs) accounted for almost 100% of Nvidia’s business, but now account for less than 20% of the company’s business. Over the years, Nvidia has transitioned into a software centric company primarily serving four key markets – gaming, automotive electronics, enterprise graphics, and high-performance computing (HPC).
Our price estimate of $23 for Nvidia is slightly above the current market price. We will update our valuation for the company after its Q1 2016 earnings release.
Automotive & Shield to Drive Growth In Nvidia’s Tegra Business
While mobile computing has been a key focus area and the largest segment for Nvidia’s Tegra business in the last few years, the company claims that automotive and SHIELD (Nvidia’s gaming device) now represent the vast majority of its Tegra revenue. Nvidia expects the two segments to be the biggest growth driver for its Tegra division in fiscal 2016.
The automotive segment is the fastest growing sub-segment 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.
Strategy Analytics expects the market for Advanced Driver Assistance Systems will generate around $15 billion in 2016, with a CAGR of 23%.  Nvidia has been working on building its automotive computing platform for over a decade and is in a strong position to leverage this growth. The company’s automotive platforms remain on a sharp upward trajectory with over 7.5 million cars using Nvidia’s technology at present, up from 4.7 million a year ago.
In the last few quarters, Nvidia has significantly expanded its Shield lineup, which includes the Shield Android handheld console, Shield tablet, and an Android TV console. Nvidia claims that the mobile gaming is a $70 billion market and is growing rapidly internationally. The mobile cloud is probably one of the most important disruptions in the history of computing, and yet there’s really no computer gaming architecture that serves mobile cloud very well. According to Nvidia, SHIELD offers the platform that allows the mobile cloud to bring gaming to an under-served and new market. Given its strong graphics and processing capabilities, the company is able to deliver a compact powerful and optimized system to eager gamers.
Large-Scale Data Centers To Be A Significant Source Of Future Growth
The release of the Kepler-based GPUs in 2013 fueled Nvidia’s growth in professional graphics and translated into higher market share and margins for the company. Nvidia remains the dominant player in professional GPUs. The company launched the new Quadro product platform, which provides up to two times the improvement in application performance and data handling capability, in August 2014. The Quadro professional solutions, including processors based on the new Maxwell GPU architecture, are seeing a fast ramp up in the market and are being shipped by all of Nvidia’s major OEM partners. For the sixth year in a row, every film nominated for an Academy Award for special effects was made using Quadro.
The NVIDIA GRID graphics virtualization platform continues to gain momentum with more than 300 companies worldwide testing the product in recent months. Over 1,000 enterprises worldwide have evaluated the GPU server platform though the tri-grid online demonstration, up from just 400 a year ago. Nvidia launched a program with VMware for early customer access to GRID virtualized GPUs in August last year. The program is drawing wide global interest, and some of the early customers include: the aircraft maker Airbus, the international construction group CH2M Hill, healthcare provider MetroHealth, Villanova University and Halliburton. About a week back, VMware rolled out the latest version of its vSphere virtualization software, including full support for Nvidia’s GRID vGPU graphics virtualization technology.
Nvidia’s accelerated computing platform is also seeing strong growth as HPC customers and cloud service providers continue to deploy large GPU-enabled systems. In Q4 2015, the company introduced its new flagship Tesla offering (Tesla K80 Dual-GPU) which provides nearly twice the performance and double the memory bandwidth of its predecessor, the Tesla K40. The U.S. Department of Energy recently announced that its next generation of supercomputers will utilize Tesla GPU accelerators in conjunction with NVIDIA NVLink high-speed interconnect technology.
Transition To Maxwell Drives Growth In High End PC Gaming
Nvidia completed the product transition to Maxwell based GPUs (desktop, notebook and workstation) in Q3 2015. Maxwell is Nvidia’s 10th generation GPU architecture, offering 2X the performance power of the Kepler architecture, which the company had touted as the most energy-efficient GPU ever built by it. Backed by the Maxwell refresh and the seasonal increase in consumer PCs, Nvidia’s GPU business grew 13% and 11% year on year in Q4 2015 and fiscal 2015, respectively.
Nvidia added the GTX 960 processor to its Maxwell lineup last quarter, bringing the Maxwell platform to the $199 segment, which the company considers to be the gaming market sweet spot. There are now more than 50 million PCs with GeForce Experience, which aims to bring the simplicity and the community benefits of the console to the PC. In the month of November alone, GeForce Experience users downloaded Nvidia drivers over 30 million times.
PC gaming represents almost 40% of the worldwide gaming market, which is higher than consoles, phones, tablets or any other individual gaming segment. 
View Interactive Institutional Research (Powered by Trefis):Notes:
- Nvidia’s CEO Discusses F4 Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 [↩]
- Nvidia’s CEO Discusses F3Q 2014 Results – Earnings Call Transcript, Seeking Alpha, November 7, 2013 [↩]