Nvidia (NASDAQ:NVDA) recently organized a financial analyst day where it talked about its main product brands like GeForce, Tegra, Tesla and Quadro. The growth in Tesla is especially significant and it is interesting to see how it has picked up in 2010. Nvidia (NASDAQ:NVDA) competes with companies like AMD (NYSE:AMD) and Intel (NASDAQ:INTC) in the graphic processors business. The company also competes in mobile market with its mobile computing chips like Tegra. We take this opportunity to discuss how valuable Tesla product is turning out to be for Nvidia.
Our price estimate for Nvidia stands at $21.29 which is a premium of roughly 15% to market price.
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Nvidia’s Tesla GPU Growth
Tesla is a GPU product by Nvidia that focuses on high performance computing. GPU computing essentially refers to the use of a graphics processing unit to do general purpose scientific and engineering computing. Nvidia launched Tesla in few year back and the sales have picked up significantly since then. Tesla’s adoption has led to sales that surpassed Quadro, which is another GPU dedicated to professional services. According to the company, sales will increase from over $20 million in FY 2010 to over $100 million in FY 2011. 
Nvidia earned close to $818 million in revenues from its professional GPU business in 2010 (or Nvidia’s fiscal 2011). Although this accounts for less than 25% of Nvidia’s revenues, we estimate that professional GPU business constitutes about 37% to Nvidia’s value given its high margins. If we look at Tesla, its revenue contribution to Nvidia’s professional GPU business segment has increased from a mere under 2% in 2008 to just under 13% in 2010.  This rate of adoption signifies Nvidia’s command in professional GPU market increasing value of Tesla. We estimate that Nvidia had a share of about 87.5% in this market in 2010.
While Tesla will help Nvidia to fend off market share losses, the general growth in high-end computing may end up stimulating market growth higher than we forecast leading to potential upside to our price estimate. Several industry segments make use of high-end computing including life sciences, energy, scientific research, defense, manufacturing and finance. In the future, several emerging applications like genome sequencing, verilog simulation, data analytics, and machine vision will require high performance chips.  This could stimulate market growth for professional GPU units thereby significantly benefiting Nvidia, which is the leader in this arena. In the above modifiable charts you can see how a higher growth than forecast will lift Nvidia’s price estimate.Notes: