Scenarios That Can Change Our Valuation For Nvidia

Nvidia (NYSE:NVDA) designs and develops GPUs that are used to offload the burden of graphics processing from CPUs. The GPU market is segmented into discrete and integrated GPUs. While the integrated GPU market is dominated by Intel and AMD, the discrete GPU market, where high performance is required, is still dominated by Nvidia. The company also earns revenue from products based on Tegra SoC that include its DRIVE and SHIELD platform used in automotive computers and gaming consoles respectively. Below we discuss scenarios related to Nvidia that can change our valuation for the company:

A) Faster than expected growth in Tegra processor revenues: We currently forecast Nvidia’s Tegra revenue to increase from $559 million in 2015 to $1.75 billion by the end of the Trefis forecast period. 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 its DRIVE and SHIELD (Nvidia’s gaming device) now represent the vast majority of its Tegra revenue. Given its strong graphics and processing capabilities, the company is able to deliver a compact powerful and optimized system to eager gamers.

Recently it has been rumored that Nintendo’s upcoming NX console will feature NVIDIA’s Tegra platform. This is a significant win for Nvidia because until now it had failed to gain a spot for its Tegra processor in any leading gaming console. Major gaming console companies such as Microsoft and Sony use AMD’s GPU to power their Xbox One and PlayStation 4, respectively. Even Nintendo uses an AMD GPU for its current gaming console – the Wii U. If the rumors about Nintendo switching to Nvidia’s Tegra processor were to be true, we can expect more design wins for Nvidia going forward.

Furthermore, Nvidia has been working on building its DRIVE platform for automotive computing for over a decade and is in a strong position to leverage this growth. The company has shipped 5-to-6 million devices for cars (with its Advanced Driver Assistance Systems) and has an additional 20-to-25 million such devices to ship in its pipeline. In addition to its infotainment cockpit business, Nvidia is working with a number of companies that are developing self-driving car technologies, using NVIDIA DRIVE PX. These include car manufacturers, Tier 1 OEMs, start-ups and research institutions. The latest of Nvidia’s agreement is with Chinese search engine company, Baidu, to build an open platform for self driving cars. ((Baidu and NVIDIA Team Up on World’s First Map-to-Car Platform for Self-Driving Cars, nVidia Blog, September 2016))

Given the above factors, it is possible that we are currently underestimating the growth potential for Tegra processors. If Nvidia is able to increase its Tegra revenue base to over $2 billion and manages to improve EBITDA margins to 30% (higher revenue contribution from automotive could significantly improve margins), our valuation for the company will increase by more than 20%.

B) Continuous increase in Nvidia’s discrete graphics processor market share: We currently forecast Nvidia’s discrete notebook and desktop GPU market share to marginally decline over our review period, as AMD looks to re-gain its lost market share with some new GPU designs. However, in the last few quarters Nvidia has managed to extend its lead in the GPU market over AMD. Keeping in mind the higher level of investment, for a narrower range of products compared to AMD, Nvidia could manage to further extend its lead in the discrete GPU market. If Nvidia’s market share in the discrete GPU market reaches 90% (in both notebooks and desktops), our valuation for the company will increase by over 10%.

See our complete analysis for Nvidia

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