Nvidia's Dominance In GPUs And Higher Tegra Sales Lift Outlook

| About: NVIDIA Corporation (NVDA)

Nvidia (NASDAQ:NVDA) registered 7% annual growth in its fiscal 2013 revenues while many of its competitors -- including Intel (NASDAQ:INTC), AMD (NYSE:AMD) and Texas Instruments (NYSE:TXN) -- posted annual declines in their calendar 2012 earnings. At $1.1 billion, its Q4 2013 earnings declined by 8.1% sequentially though this represented 16.1% year-over-year growth on account of higher Tegra sales and its growing GPU business.

Despite macro headwinds and a sluggish PC market, fiscal 2013 was a record year for Nvidia as it reached $4.3 billion in sales and increased its gross margin to 52.3%, compared to 51.9% in fiscal 2012. Nvidia claims to have increased its GPU market share from 53% to 65% and its notebooks market share from 47% to 66% last year. It remains committed to investing in new growth opportunities and has a gamut of products that will sample in 2013 -- Tegra 4, i500 4G LTE modem and Project Shield.

With the increasing revenue contribution from the non-PC business segment and its dominance in the GPU market, we feel that Nvidia has strong fundamentals to support a higher valuation. Additionally, the company has a solid balance sheet with a strong cash position and no debt.

GPU Division Continues to Grow Despite a Sluggish PC Market

In March 2012, Nvidia launched its new Kepler graphics processing unit (GPU) architecture, which is the first architecture to include virtualization technology built right into the GPU. The company claims that Kepler is its most efficient GPU architecture to date, and the introduction of the same has translated into higher market share and margins. Despite flat global PC shipments, Nvidia's GPU revenue grew by 2% in its fiscal 2013.

Nvidia transitioned its Kepler architecture across its GPU portfolio and started shipping Kepler into its Quadro products last quarter, which translated into a 10% sequential increase in Quadro revenue. Weak demand for Quadro products led to a 4.2% year-over-year decline in Nvidia's professional solution business in Q3 2013. We believe that the lower demand was on account of enterprise weakness and feel that the introduction of Kepler architecture will help the company retain its dominance in the professional graphics market in the future.

Last year, Nvidia introduced the world's first cloud-based GPU built on the Kepler architecture. Driven by growing acceptance of the Kepler architecture, Nvidia reported record revenues from its notebooks products and managed to gain additional market share in notebooks as well as desktops.

Tegra 4 Could Bring in Higher Revenues Compared to Tegra 3

Nvidia saw a 29.3% increase in its Tegra processors sales in fiscal 2013. Tegra products for smartphones and tablets grew by 50% from $181 million in fiscal 2012 to $541 million in fiscal 2013. Non-PC revenue accounted for around 30% of Nvidia's overall revenue, compared to 7% three years ago. Tegra 3 quad-core processors powered many of the world's popular devices in 2012 -- Google's Nexus 7, Microsoft's Windows RT Surface tablet, Lenovo's IdeaPad Yoga 11, Fujitsu's ARROWS X, the world's first Windows RT tablet by Asus, etc.

At the Consumer Electronics Show 2013, Nvidia introduced the Tegra 4 processor, which it believes to be the world's fastest mobile processor. Tegra 4 offers six times the GPU horsepower of Tegra 3, and unlike its predecessor, it is also LTE compatible. With an optional chipset, Tegra 4 offers worldwide 4G LTE voice and data support. We believe that the LTE compatible chipset will better equip Nvidia to challenge Qualcomm's (NASDAQ:QCOM) growing dominance in smartphones, helping it increase its penetration in the market.

In its Q4 2013 earnings call transcript, Nvidia highlighted that it has already scored more design wins for Tegra 4 compared to the total design wins for Tegra 3. In addition to mobile devices, Tegra 4 is gaining popularity for use in embedded devices such as cars and gaming devices.

Q1 2014 Outlook

  • $940 million in revenue, +/-2%
  • Lower GPU sales in line with overall expectation in the PC industry
  • Lower Tegra sales as customers reduce demand ahead of Tegra 4 production
  • Gross margins of 52.9%, flat from Q4 2013
  • $430 million in operating expenses
  • Tax rate of approximately 16%, +/- 1%
  • Depreciation and Amortization: $59 to $61 million
  • Capex: $55 to $65 million

We are in the process of updating our price estimate of $19.14 for Nvidia.

Disclosure: No positions.