How Tegra Can Become Nvidia’s Most Valuable Segment

Nvidia (NASDAQ:NVDA) has traditionally designed and developed discrete and integrated GPUs for notebooks, desktops and workstations. As the introduction of APUs from Intel (NASDAQ:INTC) and AMD (NYSE:AMD) has forced Nvidia to exit integrated graphics business, the company is looking at the other avenues for its revenue growth. One of them is expanding into mobile computing market.

The company’s push into this market is not just out of necessity to compensate for a declining business, but also because of the existence of a vast market opportunity resulting from the rapid growth in smartphones and tablets. The company had a successful year with its dual-core Tegra 2 processors and also acquired Icera, the maker of baseband chips. Nvidia expects Tegra related revenues to grow by 50% next year.

This begs a question – how big this business can be? Smartphone and tablet market is growing fast but is dominated by Qualcomm (NASDAQ:QCOM) and others. However unlike Intel, even little share in this growing market can mean a lot for Nvidia. Tegra has the potential to become its biggest business within a span of less than a decade. How can that happen?

See our complete analysis for Nvidia

We currently forecast Nvidia’s mobile & game console computing chip revenues to grow to $2 billion by end of our forecast period. These revenues will be almost solely dominated by Tegra products. However this implies that this business accounts for just 7.5% of Nvidia’s estimated $12.9 billion value. This is roughly one-fourth of the value that its professional GPU business brings to the table.

However the equation can change if Nvidia can gain a share of about 10% in the growing mobile computing market, which we expect to amount to close to 1.4 billion units by end of our forecast period. This market will comprise of smartphones, tablets and other market opportunity devices that can make use of the Tegra processor. A 10% share, in tandem with a rough pricing of $25 per processor will imply close to $3.4 billion in revenues from Tegra related products.

However this alone is not enough to propel this business past Nvidia’s valuable professional graphics business. Nvidia will also need to lift its Tegra related margins to about 30% by end of our forecast period.

In short, a 10% market share with 30% EBITDA margins in next 7 years is something that can turn Tegra into single biggest business for Nvidia.

Our price estimate for Nvidia stands at $21.19, implying a premium of about 40% to the market price.

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