Can Project Denver Justify Nvidia’s Stock Run?

by Trefis Team
-1.46%
Downside
18.70
Market
18.43
Trefis
NVDA
nVIDIA
Rate   |   votes   |   Share

Nvidia (NASDAQ:NVDA) has traditionally competed in the graphics processor business with Intel (NASDAQ:INTC) and AMD (NYSE:AMD), but is now looking to expand its horizons. The company’s stock has had a tremendous run over the past month, increasing almost 30%. Part of this recent growth can be attributed to investor’s expectations that Nvidia would venture into the CPU business, which it hadn’t touched at all until now.

Nvidia recently announced plans for “Project Denver” at the 2011 Consumer Electronics Show. Under this project, Nvidia will build high-performance ARM architecture based CPU cores that will support regular desktop and notebook PCs as well as servers and super computers. The project brings Nvidia into direct competition with the microprocessor businesses of Intel and AMD.

To support Nvidia’s plans, Microsoft (NASDAQ:MSFT) announced that its next version of Windows will be capable of running on ARM-based CPUs. So far, it has only supported x86 architecture which is the basis of CPUs sold by Intel and AMD.

Our current price estimate for Nvidia stock is $13.43, which stands about 30% below market price in the wake up the recent run-up. Can Project Denver justify this market price premium? Here we explore the potential stock value upside stemming from the company’s new strategic initiative.

Stock Price Implies Nvidia Can Grab More than 5% Microprocessor Market Share

If we are to assume that the difference between our estimate and market price can be explained by Nvidia’s foray into the CPU business, it implies that this business expansion could potentially add $2.8 billion in value to Nvidia.

What does this $2.8 billion imply in terms of operating performance for Nvidia’s CPU business?

To start, let’s assume Nvidia’s average CPU pricing settles around $100 (similar to our Intel estimates for notebooks). Given Intel’s market dominance and scale, it is unlikely that Nvidia could match Intel’s operating profit margins (an estimated 50% on notebook processor sales in 2010) in the near term, so let’s assume EBITDA margin of roughly 30% for Nvidia. Further, this margin range is closer to what Nvidia gets for its GPUs.

Assuming 30% EBITDA margin, and taking into account indirect expenses like capital expenditures and taxes, a back of the envelope calculation suggests that Nvidia will need to establish steady market share of at least 5.5% by the end of 2016. In order to do this, Nvidia will have to wrestle share away from the two dominant players in the microprocessor market – Intel (with an estimated 80% market share) and AMD (about 20%).

Can Nvidia do it? Let us know your thoughts by providing feedback in the comment box below.

Register to win a free iPad. Visit our home page at trefis.com for details.

You can see the complete $13.43 Trefis price estimate for Nvidia’s stock here.

See our full company breakdown and estimates for key drivers to Nvidia’s stock value in the display below.

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!