Nvidia (NVDA) is one of my top stock picks for 2013. The chipmaker was beaten down over the course of 2012, moving from a $14-$16 trading range early in the year down to a 52-week low of $11.15 in November. While the stock has bounced back somewhat, Wednesday's closing price of $12.21 is still well below my estimate of the company's intrinsic value. As I wrote last month, a sum of the parts analysis shows that the company is worth approximately $18. Shareholders have received several pieces of good news recently, which should support share price appreciation this year. Most importantly, Nvidia announced several new products at the annual CES (Consumer Electronics Show) in Las Vegas (a replay of the webcast is currently available here).
CES: A Brief Recap
The most eagerly anticipated product was Tegra 4 ("Project Wayne"), the next generation of Nvidia's system on a chip. However, as CEO Jen-Hsun Huang told the audience, Tegra 4 has been so highly anticipated that most of the specs had leaked long ago. As expected, the chip will be a significant improvement over Tegra 3 in terms of computing power. Tegra 4 finally leverages Nvidia's graphics capabilities, with a 72-core GPU package to complement the quad-core ARM (ARMH) A15 CPU. Nvidia claims that Tegra 4 is faster than any mobile processor currently on the market, besting even the A6X in Apple's (AAPL) newest iPad. In a web browsing test run during the CES presentation, a Tegra 4 chip was able to open a series of web pages almost twice as fast as a Samsung (SSNLF.PK) Exynos chip (1 second per page vs. 2 seconds per page). Moreover, Nvidia stated that "Tegra 4 consumes up to 45 percent less power than its predecessor, Tegra 3, in common use cases." Tegra 4 also includes some neat technology that will improve digital photography, which is increasingly important to smartphone users.
All that said, the competition is not standing still. Qualcomm (QCOM) also announced a new generation of its Snapdragon line of mobile processors at CES. Tegra 4 will probably make it to market a few months before the new top-of-the-line Snapdragon 800. On the other hand, Qualcomm promises a 75% performance improvement over the Snapdragon S4 Pro, which means it will probably be faster than Tegra 4. Moreover, Qualcomm will be able to offer the new Snapdragon chips as part of integrated SoC/baseband packages from the get-go. Nvidia, by contrast, is still working on creating an integrated processor ("Grey"), which will likely become available in the fall. In sum, Qualcomm is still ahead, but Nvidia appears to be closing the performance gap.
Nvidia is also doubling down in the gaming segment. The company announced a variety of products and services that will hopefully allow it to build on its strengths in the gaming market. For instance, GeForce Experience will automatically optimize game settings to take full advantage of your computer's graphics capabilities. With "GRID" Nvidia is finally launching a cloud-based gaming system, an initiative that management has mentioned several times recently. Broadband internet connections will allow users to play video games running on high performance GPUs located in remote servers, with the video streamed back to a computer or TV.
Finally, with Shield, Nvidia is launching its own portable gaming device. While there were some technical difficulties during the demo at CES, it seems like an interesting concept. It can operate as a standalone Android game console (and includes a touchscreen as well as a controller). However, Shield can also stream games from PCs equipped with newer Nvidia GPUs and output to a TV. Shield has the potential to be disruptive to the gaming industry, but it will depend on growing the library of high-quality Android games that work with controllers (rather than touch-only). Moreover, portable gaming device sales have been in decline due to competition from smartphones and tablets. Nvidia may have trouble convincing users that they still need standalone gaming devices. Nevertheless, given Nvidia's "street-cred" with hardcore gamers, Shield should generate decent sales even if it never achieves mainstream popularity.
Taxes are Actually Going Down...
While the rest of America has had to face tax increases in 2013 (primarily a return to higher payroll taxes), Nvidia actually got a tax break as part of the resolution to fix the "fiscal cliff." The research and development tax credit had been allowed to lapse at the end of 2011 due to congressional inaction. However, Congress voted to retroactively extend it through 2012 and 2013. Nvidia spends a significant amount of money on R&D, and is therefore a major beneficiary of this legislation. Management has stated on numerous occasions that the company's tax rate for 2012 would drop from approximately 20% to 16% if the R&D tax credit were reinstated. This change will boost EPS by roughly 4 cents in 2012 and 5 cents in 2013.
iMac Will Finally Ramp
Nvidia won a coveted design slot this fall for the new iMac. The smaller version went on sale in November, with the larger model going on sale in December. As of Wednesday, there is still a significant order backlog for both models, but particularly the larger 27" iMac. This is due in part to supply constraints, but it also suggests strong demand. With the channel virtually empty, Apple will probably be looking to produce 1 million units or more in each of the next few quarters. As production ramps up, Nvidia could see a nice boost to GPU sales in what could otherwise be a seasonally weak Q1FY14.
Despite posting some fairly good news recently, Nvidia's stock price has been dragged down by general worries about the PC market. In light of the company's pristine balance sheet and strong product portfolio, I expect Nvidia to weather the choppy 2013 PC environment very well. With the stock trading well below my estimate of fair value, I am looking to add to my position this week.