Nvidia (NVDA) is the world's largest producer of discrete Graphics Processing Units (GPU) that is used in PCs and laptops. The company competes directly with Advanced Micro Devices (AMD) and Intel (INTC) in the GPU market. Nvidia was the first company amongst these three companies to make a major move in the mobile processor segment. The company has managed to attain decent success in the mobile and smartphone SoC industry through its Tegra line of processors. However, the company has seen its Tegra sales stall, as the company focuses on integrating 4G LTE capabilities with its new Tegra 4i product. The market is adopting LTE faster than expected, which has made NVDA management push back Tegra 4 in order to focus on Tegra 4i. Nvidia is also facing pressure in its GPU segment as global PC sales are dropping faster than expected. However I remain positive on Nvidia's stock; given the management's strong efforts in diversifying into new areas such as the "Grid" and "Project Shield." Nvidia is a world leader in graphics processing which is becoming more important, with customers demanding improved display and graphics. The current scenario may not look too great for Nvidia but the long-term possibilities are very attractive. The company has a very good balance sheet with lots of cash. The $1 billion stock "buyback" should also support the stock.
1) Impressive growth in revenue and margins - Nvidia has managed to grow revenues at an impressive pace. The company's revenues have more than doubled in the past decade, growing from $1.8 billion in 2003 to $4.2 billion in 2012. The margin improvement has been even more impressive, with the gross margin increasing continuously from 29% in 2003 to 52% in 2012. This has allowed Nvidia to grow its EPS from 14c/share in 2003 to 90c/share in 2012.
2) Strong Balance Sheet - NVDA has a very strong balance sheet with ~$3.7 billion in net cash. The company generates a large amount of operating cash flows which allows it to invest in new businesses without resorting to debt. Almost 45% of NVDA's current stock price can be accounted by cash alone.
3) Visual Computing Leader - Nvidia is the leader in supply of discrete GPUs to the PC market. As the table below shows, NVDA is winning market share from both AMD and Intel in the GPU space. The company's new GTX Titan product is the best performing GPU in the market and has received a very enthusiastic response from gamers. NVDA's products are vital for designing, gaming etc. As the company continues to improve its visual computing capabilities, more applications are being discovered. This is the core strength of Nvidia and the company has been building on this strength.
Table 1 : Total Graphics Chip Market shares
Shipment (M units) This quarter
Market share this quarter
Last quarter (M units)
Market share last Qtr
Unit Change Qtr-to-qtr
Share Difference Qtr-to-qtr
M Units a year ago
Market Share last yr.
4) Acquisition target - NVDA's small EV means that the company can be easily acquired by bigger technology companies like Samsung. Note Samsung would love to increase its lead in the semiconductor technology and a NVDA buy would give Samsung a huge edge. Samsung recently bought the mobile business of Cambridge Silicon Radio (CSR) to strengthen its semiconductor Bluetooth, GPS and RF solutions. Apple and Intel could also look into buying NVDA, though Intel could face strong anti-trust problems.
5) Valuable Patent Portfolio - Intel and Nvidia had started a legal case against each other in 2009 which was finally settled in 2011. As part of the settlement, Nvidia has allowed Intel to uses its GPU patents for a consideration of $1.5 billion to be paid over 6 years. This shows the importance of Nvidia's patent portfolio and its lead in the visual computing technology.
6) Early to catch the Mobile Devices Wave - Nvidia was amongst the first "PC" companies to recognize the shift towards mobile devices such as tablets and smartphones. The company invested heavily into building SoC for mobile devices. Intel and AMD entered the mobile devices processor after Nvidia had established some solid design wins. The company started supplying Tegra chips for the mobile devices market in 2009 with the MSFT's Kin smartphone being its first major design win. Nvidia was also the first company to introduce a quad core SoC for mobile devices in 2011. The company has managed to win important clients in the automotive sector through its Tegra line of products.
7) Strong presence in the automotive sector - Nvidia is soon going to launch new generation processors for the tablet market. Nvidia is making Tegra not only for smartphones and tablets but also for cars. The company has already managed design wins in 34 models of cars from 7 different companies. Tesla's (TSLA) Model S uses two Nvidia Tegra 3D Visual Computing Modules (VCM). The management is projecting that they will generate $450 million in revenues from Tegra sales to automotive sector by 2016.
8) Virtual Graphic Processing - GRID - Nvidia is introducing a new product line called the "GRID" which would lead to the virtualization of graphic processing with the attendant advantage of lower cost. This technology will allow the separation of the graphics processing unit from the workstation/PC. The GPU would reside on the network and allow any terminal to access the graphics processor. This will lead to better control as well as much lower costs. Management thinks that GRID is a $10 billion opportunity for the company.
The way to think about GRID, I think of it as an appliance, we've taken just like they've taken storage out of the box. Just like they have taken networking out of the box. We've taken computer graphics out of the box. That's essentially what we've done. We have to invent new technologies to make that possible, but that's essentially what we have done. GRID is about $10 billion opportunity for us. Gaming, thinking about Netflix per games, there is 700 million cable subscribers, some percentage of those would subscribe to a game, some percentage of those would be using it concurrently, and based on that concurrency that's the size of the server you need to build.
9) Gaming through "Project Shield" and "Tegrazone"- Nvidia is the leader in providing high-end graphic chips for gamers. The company is further consolidating its position by introducing a new standalone device called "Project Shield" with an Android OS. This handheld gaming console will be released in Q213.The console will allow streaming of games which are running on a compatible PC. The company has also launched its own virtual game store called "Tegrazone" for Android games.
10) Valuation - NVDA is cheap with a P/S 1.9x and a P/B of 1.7x. The total market capitalization is $8.1 billion. The company has almost ~$3.7 billion in net cash which gives it an enterprise value of ~$4.4 billion. Nvidia has also started giving a dividend in recent times following the lead of other major technology companies.
- Formidable Competition - Nvidia faces the two largest semiconductor companies Qualcomm and Intel as competitors in the tablet and smartphone SoC market. While Qualcomm already has a technology advantage over others with its communications expertise, Intel is pouring huge resources to get a lead in the mobile semiconductor market. Asian vendors like Mediatek and Spreadtrum are strong in the lower end of the smartphone SoC market through their cheap offerings. In the discrete GPU segment, Nvidia faces lower competition with AMD being the only major threat. However, AMD is making a big effort to regain lost market share from Nvidia. AMD has tied up with game developers to bundle its graphic processors with games in order to push its GPU sales. AMD has also captured the entire game console space winning the contracts to supply advanced APU's to Sony (SNE), Microsoft (MSFT) and Nintendo.
- Technology Risk - Nvidia like Qualcomm and AMD operates in the "fabless" model which means that the company outsources all of its manufacturing to foundries such as TSMC (TSM). If these foundries fail to transition to smaller process nodes and keep up with Intel's manufacturing lead, then Nvidia will be made technologically obsolete. Intel is going to start manufacturing mobile chips on the 22 nm process node later this year which will give it an edge over other manufacturers. Another weakness of the "fabless" model is that NVDA might face capacity constraints at leading edge nodes. Even if the company has demand, it may not be able to meet it, if it cannot get the supply from its foundry partners.
- Surface RT failure and Nexus loss to Qualcomm - Nvidia had managed to win big accounts from both Microsoft and Google (GOOG) for its Tegra processors. However, MSFT's first AMR based processor product - Surface RT has proven to be a big failure. NVDA also lost to Qualcomm in supplying processors for its next generation Nexus tablets. Both these failures are seriously hurting NVDA's ambitions in the mobile devices market.
- Declining PC and laptop market - Nvidia like other major "PC" semiconductor stocks is facing serious issues from the decline in the PC market. IDC's latest Q113 figures revealed a sharp decline in PC sales. Nvidia generates most of its profits by selling graphics processors for desktops and laptops.
Nvidia's stock has given a decent ~8% return in 2013 which is similar to returns given by Intel and AMD. Over the past 5 years, Nvidia stock has given a ~29% loss compared to the 2% profit given by Intel. Over a longer time period of 10 years, NVDA has significantly outperformed both Intel and AMD with a 196% return.
Nvidia faces significant near-term challenges with growing competition in the mobile processor market and declining PC sales. The company has lost the Nexus design to Qualcomm and Windows RT has been a failure. The company is in the process of developing new products which might also not succeed. On the plus side, NVDA has a very good balance sheet with a very profitable GPU business. The company management is pretty good and is not afraid to face new challenges as well as take calculated risks. The company's stock may remain range bound as the management is in the midst of investing in new areas, while its bread and butter GPU segment shows a gradual decline. However, I remain positively inclined towards NVDA, given its cheap valuation and leadership in the visual computing industry.