VALUATION HIGHLIGHTS

1. GPUs constitute 88% of the Trefis price estimate for nVIDIA's stock.
2. Tegra Processors constitute 11% of the Trefis price estimate for nVIDIA's stock.

WHAT HAS CHANGED?

Q3 '21 Earnings

Nvidia posted a 55% Y-o-Y jump in its top line, driven primarily by its expansion into data centers. Higher R&D and SG&A expenses meant that net income rose by a little less than 50% from $0.9 billion to $1.33 billion, driving EPS from $1.47 to $2.16.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Nvidia's value that present opportunities for upside or downside to the current Trefis price estimate for Nvidia:

Tegra Processors

• Faster Than Expected Growth In Automotive & Shield Tegra Processors: We currently forecast Nvidia's Tegra revenue to increase from $1.5 billion in 2017 to $4.0 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 over 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 has been working on building its automotive computing platform for over a decade and is in a strong position to leverage this growth. In the last few years, Nvidia has significantly expanded its Shield lineup, which includes the Shield Android handheld console, the Shield tablet, and an Android TV console. Given its strong graphics and processing capabilities, the company is able to deliver a compact powerful and optimized system to eager gamers. 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 $6 billion and manages to improve EBITDA margins to 40% (higher revenue contribution from automotive could significantly improve margins), our valuation for the company will increase by 10%.

Graphic Processors

• GPU Revenue: We currently forecast Nvidia’s GPU Revenue to increase rapidly to nearly $19 billion by the end of the forecast period. However, the market opportunity for Nvidia in Artificial Intelligence domain is huge ~ $30 billion. The company's GPUs have shown a clear edge over other chips in terms of enabling parallel computing. There is a chance that our estimates may turn out to be conservative. In a scenario where Nvidia's GPU revenue increases to ~ $25 billion by the end of our forecast period, our price estimate can see an upside of nearly 25%.

For additional details, select a driver above or select a division from the interactive Trefis split for Nvidia at the top of the page.

BUSINESS SUMMARY

Nvidia designs and develops Graphics Processing Units (GPUs), which are high performance processors that generate realistic and interactive graphics on PCs. A computer's Central Processing Unit (CPU) off-loads the burden of graphics processing to GPUs. In this way, a dedicated GPU and CPU work in tandem to increase the overall speed and performance of a system. The GPU market is typically segmented into discrete and integrated GPUs. Integrated GPUs, which were once found in the majority of PCs, have been replaced by Intel and AMD's APUs. However, discrete GPUs are preferred by customers such as gamers or design professionals for high performance and 3D graphics. Within discrete GPUs, high-end discrete GPUs form the professional graphics cards market in which Nvidia has a significant market share. Nvidia sells its products directly to PC manufacturers, such as Dell, HP, Toshiba, and Sony. In addition, the company also sells some of its high-end GPUs directly to consumers through retailers such as Best Buy. The company also has a data center division which includes Tesla for AI utilizing deep learning and accelerated computing, leveraging the parallel computing capabilities of GPUs for general purpose computing, and GRID to provide the power of NVIDIA graphics through the cloud and datacenters.

Nvidia also earns revenue from products based on Tegra SOC and modem processor technologies, which includes Tegra for automotive computers, including infotainment and navigation systems; and gaming devices, including Project SHIELD. 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 drivers for its Tegra division.

SOURCES OF VALUE

Graphics Processing Units (GPUs) are the major sources of revenue for the company. GPUs are used by gamers or design professionals for high performance and 3D graphics. Nvidia's GPU lineup includes GeForce for PC gaming, GeForce NOW for cloud-based game-streaming service, Quadro for design professionals working in computer-aided design, video editing, special effects and other creative applications, Tesla for AI utilizing deep learning and accelerated computing, leveraging the parallel computing capabilities of GPUs for general purpose computing, and GRID to provide the power of NVIDIA graphics through the cloud and datacenters.

KEY TRENDS

Crypto Headwinds & China Woes

Crypto currencies have seen a massive decline in the recent past, and the demand for graphics cards has faded, which were earlier sought for crypto mining. Also, foreign tariffs imposed on China, and the overall slowdown in Chinese economy has impacted Nvidia's sales towards the end of 2018. The company has guided for a weak 2019, amid continued woes from the above two factors. Note that China and Taiwan combined account for over 50% of Nvidia's sales.

Nintendo Sales Aiding Tegra Processors Segment Growth

Nvidia's solid growth for its Tegra Processors segment in the recent quarters can partly be attributed to growth in its SOC modules for consoles, such as Nintendo Switch. Note that Nintendo Switch has been a very successful console, and more than 20 million units have been sold since its launch last year. Nintendo Switch sales are expected to ramp up and reach over 37 million units by March 2019. The console uses Nvidia’s SOC modules, and such growth in the demand for console will bode well for Nvidia.

Increasing Adoption of Deep Learning Across Multiple Industries to Drive Nvidia's Data Center Growth

GPU-accelerated data centers are expanding in both High Performance Computing (HPC) and the cloud, driven by the growth of deep learning and Big Data. GPU’s have become the accelerator of choice for hyper scale data centers due to their superior programmability, competitive performance, and power efficiency. The launch of VR can lead to potential growth in the enterprise segment, across multiple industries. Nvidia powers IBM lesson and Facebook’s big source server form Artificial Intelligence (AI). It is present in AI platforms at hyperscale giants such as Microsoft, Amazon, Alibaba, and Baidu for both training and real time influence. Nvidia is engaged with nearly 3,500 companies and organization in the development of the deep learning technology.

Expansion in Gaming

The gaming ecosystem and the gaming industry is approximately $100 billion large. Growth in gaming is expected to be fueled by the anticipation of new blockbuster games, the rise of eSports, the emergence of new technologies like virtual reality (VR) and Direct X, and the expansion in developing countries. Nvidia’s gaming platform has been growing at a >25% rate for the last two years. Since Nvidia has not fully penetrated the market, it believes there is ample scope for growth.

Expansion of Advanced Driver Assistance Systems (ADAS) & Self-Driving Car Technologies To Drive Growth in the Automotive Segment

Specialty Analytics estimated the market for Advanced Driver Assistance Systems to be worth around $15 billion by 2016, with a CAGR of 23%.(Link) The automotive segment is the fastest growing sub-segment of Nvidia’s Tegra business and offers higher gross margins (compared to devices). The company 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. Nvidia has shipped almost 5-6 million devices for cars (with its Advanced Driver Assistance Systems) and has an additional 20-25 million such devices to ship in its pipeline. In addition to its infotainment cockpit business, Nvidia is working with over 80 companies that are developing self driving car technologies, using NVIDIA DRIVE PX. These include car manufacturers, Tier 1 OEMs, start-ups, and research institutions.

Growth in The Internet-of-Things (IoT) Market

Wearable devices, clothing and accessories incorporating computer and advanced electronic technologies, is a subset of the IoT market and is considered to be the next big wave in computing. Juniper Research estimates the wearable computing device shipments to increase to 150 million units by 2018. ABI Research forecast the figure to cross 450 million units . (Link) Gartner estimates the IoT market to grow almost 30 times, from an installed base of 0.9 billion in 2009 to 26 billion by 2020. It will result in $1.9 trillion in global economic value-add through sales into diverse end markets.