Nvidia (NVDA) released its second quarterly report last month. Speculations about the company's future followed this earnings report. The company's report exhibited varying performance levels by both of its product lines, namely the GPUs and mobile processors by the name of Tegra. Its strong GPU market has proved to be a savior while Tegra has experienced plummeting sales and earnings. This decline is due to its bad performance in comparison to its robust competitors such as Advanced Micro Devices (AMD) and Qualcomm (NASDAQ:QCOM).
The market for mobile processors is rapidly evolving. Going forward, handhelds and open platform devices are predicted to take up a larger chunk of the technology market. Unless Nvidia brings Tegra up-to par with its competitors, if not better, it will be difficult for it to survive against cutthroat competition. As a result of this inability, it will suffer in terms of earnings, and consequently deplete shareholder wealth. While the stock is still reasonably priced, these valuations can suffer if the company fails to generate interest in Tegra.
Nvidia is a California based American technology company that produces graphical processing units (GPUs) and more recently since 2008, System on a chip units (SOCs) that are used in mobile computing. Its renowned products are the Nvidia GeForce which is a GPU and the Tegra series which is a mobile processor (SOC). The company recently came out with a gaming tablet of its own by the name of Nvidia Shield. Nvidia also has a prominent role in supercomputing by providing parallel processing capabilities to scientists to help them carry out complex researches.
Nvidia has a Forward P/E 18.91x and a P/E TTM of 16.71x against competitor Qualcomm's P/E of 17.71x and Intel's 11.86x. These valuations show that the market expects Nvidia to outgrow the industry and outperform competitors. The real concern of shareholders is the ability of Nvidia to create a winning competitive advantage in this fiercely competitive industry.
There are a number of contributing factors to the 'expensive valuations'. Nvidia shares have shown a stable performance over the last two quarters, and investors looking at the stock as a whole would view it as a positive. In the last 2 years, the shares have appreciated approximately 13%. The company also pays a dividend yield (forward) of 2.0%.
Stable revenues and earnings of Nvidia over the past quarter are largely attributed to the robust position of Nvidia's GPUs in the PC, workstations, and console gaming market. Tegra, the company's mobile processor, underperformed during the second quarter, resulting in a sales drop of 49% QoQ, and 71% YoY. Despite the Tegra setback, Nvidia as a whole met its revenue and earnings targets in the second quarter due to a strong demand for its high-end GPUs.
Even though there is a demand decline in the mainstream PC market due to an anticipated shift to handhelds, Nvidia has been shielded from any associated losses due to its presence in the specialty PC market including gaming and high performance computing. Also, investors might be looking at the expected growth in the PC gaming market, which would benefit Nvidia's GeForce, a preferred choice for gamers as compared to Radeon by AMD or other competitors when it comes to GPUs.
However, technology gurus view the future as being dominated by handhelds. The future holds better prospects for open platforms such as Android or PCs as opposed to gaming consoles. This deems the future of mobile processors as being of greater significance in the gaming market as compared to GPUs. Thus if Nvidia wants to keep its edge in the gaming market, it would need to concentrate more on Tegra, especially if it wants to stay safe considering the predicted shift in the gaming market.
Despite high expectations, Tegra's performance has been disappointing so far. Due to the presence of better and more capable substitutes for Tegra from competitors such as Qualcomm, any weakness associated with Tegra would mean an easy shift from Tegra to its competitors. The company has already faced this phenomenon in the case of Google's Nexus 7. Google's Nexus 7 which was previously powered by Tegra 3 experienced sluggish performance which effected the sales of both the Nexus 7 and hence Tegra 3. Google thus shifted to Qualcomm's processor to power Nexus 7 after a bad response from the market. The new version of Nexus 7 is powered by Qualcomm's Snapdraon S4 Pro SoC with an Adreno 320 GPU graphics chip which would increase its speed from 1.2 GHz to 1.5 Ghz.
Nvidia's SOC side has also suffered due to a delay in the launch of the Tegra 4 after a disappointing response received by Tegra 3, delaying the shift from Tegra 3 to Tegra 4 by OEMs and thus lowering sales. The launch of Tegra 4 was delayed because the company decided to work simultaneously on the Tegra 4i and Tegra 4.
The company's CEO believes that Tegra could be adversely affecting the company's earnings since it has been facing hurdles for some time now despite tremendous opportunities in the expanding mobile market. Unless Nvidia gives serious attention to this segment, it could continue losing its market to Qualcomm.
Nvidia can still secure its future by cashing in on the expanding mobile market. This can only be accomplished by improving its mobile processor to a level where it is at least at par with its competitors, if not better. Nvidia could concentrate on an even greater penetration into the automotive industry where it has already seen some success; both Audi and Tesla (TSLA) use Tegra.
Trends in the technology industry are changing rapidly, as a shift from consoles and PCs to tablets and smartphones is already here, and any company performing parallel to this trend would be a winner. The company has already spent mammoth amounts on developing Tegra, and it is high time it shows its real capability. This will consequently result in a better perception of the company, as well as a greater share price and earnings.
Currently, Nvidia's stock is trading around $15, with a Forward P/E of 18.91x. These valuations are not high for a growth stock, so to keep these valuations Tegra needs to show topline performance. If Tegra fails to make an impression, the company's shares can come down, lest Nvidia attends to its weak areas well in time before competitors could sweep the market from Nvidia.
The company can secure its future only if it evolves with the changing and shifting trends in the technology market. An integral part of this is to ensure that its products can compete with Qualcomm. Thus, the success of Tegra 4i holds immense importance for the company. If the product finds favor with manufacturers, investors can be confident buying Nvidia's stock and can expect a better earning potential and rising share prices.
In case, Nvidia does not improve its Tegra line and keeps relying on its GPUs, and its stronghold on the specialty PC market, things could go seriously wrong for the company. The technology market is evolving rapidly, and if Nvidia is unable adapts to the changing trends, it will suffer at the hands of the competition. Therefore, although the valuations of Nvidia are still reasonable, considering it is a growth stock, investors should keep a wary eye on Tegra's future.