Graphics and mobile chip maker Nvidia (NASDAQ:NVDA) is set to announce its Q2 2013 earnings on Thursday, August 9. A slowdown in GPU sales led by the hard drive shortage, a decline in its integrated GPU business and the macroeconomic headwinds led to a 3% sequential decline in the company’s revenues last quarter. Though the semiconductor industry continues to be impacted by the soft economic conditions, we remain bullish on Nvidia’s overall outlook for 2012.

The continued momentum in mobile computing growth and Nvidia’s growing presence in the same this quarter, the Kepler GPU architecture and Apple (NASDAQ:AAPL) switching back to Nvidia’s GPUs for its next generation MacBook Pro – are some of the factors that reinforce our belief that the company might be able to weather the tough market conditions this quarter. We have a price estimate of $20.98 for the company, which is at a premium of over 50% to the current market price. We continue to believe that Nvidia has strong fundamentals to support a higher valuation.

See Our Complete Analysis for Nvidia Here

Growing Opportunities In Mobile Computing

With the ongoing slowdown in PC shipments growth rate, the increasing adoption of smartphones and tablets is slated to fuel the future growth in the semiconductor industry. According to research firm Gartner, tablet sales to end users will register a 98% increase totaling close to 120 million units this year and with the growing popularity of tablets, sales could cross the 350 million units mark by 2016. ^[1] Nvidia has been eying the lucrative tablet market as a way of challenging Qualcomm’s (NASDAQ:QCOM) growing smartphone dominance, and we believe that with a number of product wins up its sleeve it has been faring well so far.

Last year, Nvidia began a focused push into mobile computing and showed ambitions of becoming much more than a graphics chip maker. After a successful 2011 with its dual-core Tegra2 processors, the company introduced its Tegra3 processors which excel more than two times in speed and performance compared to Tegra2. Tegra3 is based on Nvidia’s low-power quad-core architecture optimized for tablets and smartphones, and its launch accelerated the company’s growth in the mobile computing segment.

While Tegra2 featured in 15 smartphones last year, Tegra3 is expected to power around 30 devices in 2012. The world’s first Tegra 3 phone was launched in February by HTC, and other phone wins includes- ZTE with the first Tegra plus Icera phones, Fujitsu, LG and K-Touch.

W.r.t tablets, this quarter turned out to be quite eventful with the launch of world’s first Windows RT consumer device by Asus and the introduction of  Microsoft’s (NASDAQ:MSFT) Surface PC tablets, both being powered by Nvidia’s Tegra 3 quad-core processors. (Read: Nvidia’s Tegra Processors To Power Microsoft’s New Surface PC Tablet and Nvidia Takes On The Mobile Market With World’s First Windows RT Device) Also, leveraging Nvidia’s low cost Kai platform, Google (NASDAQ:GOOG) finally launched its first $199 quad-core Nexus 7 tablet powered by Tegra 3 processors. (Read: Nvidia Has Easier Time Reaching $21 With Nexus 7 Debut)

Nvidia expects to ship about 25 million Tegra processors in 2012, doubling its shipments from 2011. ^[2]. Keeping in mind the progress so far, it does not look like a far fetched target to us. We estimate the Tegra related revenues to cross the $ 2 billion mark by 2018 and believe that this division could become Nvidia’s most valuable segment by the end of our forecast period.

Nvidia Scores A Point Over AMD With Mac Book Pro Order

Earlier in June this year, Apple updated its notebooks line with Intel‘s (NASDAQ:INTC) third-generation Ivy Bridge processors and, for its MacBook Pro, it switched from AMD’s (NYSE:AMD) Rodeon graphics chips to Nvidia’s (NASDAQ:NVDA) GeForce GT 650M graphics. The move could be a huge win for Nvidia, whose discrete graphics division has been facing increasing threats since the introduction of integrated graphic solutions by AMD and Intel last year. Though a switch-over to Nvidia’s graphics by Apple might not lead to significant growth in Nvidia’s discrete desktop business, it will certainly help the company defend its dominant market share. (Read: Apple Switches Back To Nvidia Graphics For The New MacBook Pro)

Positive Outlook For Products Based On Kepler Architecture

Nvidia launched its new Kepler GPU architecture in mid March this year. The first Kepler product was the GeForce GTX 680, which is faster, smaller and more power efficient than its direct competitor. It is also the first architecture to include virtualization technology built right into the GPU.

The company claims that Kepler is the most efficient GPU architecture ever created by them and expects it to translate into more market share and higher margins. Starting with desktops and notebooks, Nvidia intends to roll out Kepler into each and every one of its businesses. We believe the strong growth in notebooks will continue in the coming quarters as well, driven by Kepler design wins on the Ivy Bridge platform.

We will update our price estimate of $20.98 for Nvidia post the Q2 2013 earnings.

Understand What Drives a Stock at Trefis

1. Gartner Says Worldwide Media Tablet Sales to Reach 119 Million Units in 2012, Gartner Newsroom, April 10, 2012 [↩]
2. Estimated Brisk Tegra 3 Sales to Benefit Taiwan’s Contract Suppliers, cens.com, Dec 21 2011 [↩]