NVIDIA (NVDA) is known for its graphics chips that increase the speed of PCs incredibly when playing games or making home movies. With the invention of the GPU, the company brought forth to the world the power of computer graphics. Today, the company has gone beyond manufacturing PC graphics. Its energy-efficient processors power a broad range of products including smartphones, tablets, auto infotainment systems, personal computers and supercomputers.
The company has a diversified product portfolio to cater to the needs of different users. PC gamers rely on its GPUs to enjoy visually immersive worlds. Designers use them to create visual effects in movies and create everything from golf clubs to jumbo jets. And researchers utilize GPUs to push the frontiers of science with high-performance computing. NVIDIA has nearly 5,000 patents granted and pending worldwide, including many inventions essential to modern computing.
NVIDIA solutions are based on two important technologies: the GPU and the mobile processor. The company has three GPU product brands, which includes the GeForce (for gamers), the Quadro (for designers and digital artists) and the Tesla (for researchers and scientists).
Mobile processors incorporate CPU and GPU technologies, which synthesize an entire computer system on a single chip, or system-on-chip (SOC). Despite the remarkable computing capabilities that these modern mobile processors possess, they consume a hundred times lesser energy than a typical PC. Tegra is a mobile processor and is built for running applications on smartphones, tablets, and notebook PCs, TVs and cars. The company came up with energy-efficient mobile computing as the management believed it would bring a revolution in the way how computers were used. Tegra is NVIDIA's new major business segment that has exhibited tremendous growth over the recent years.
The company's revenue grew by 7% in FY13 as compared to FY12. This growth was largely attributable to the introduction of Kepler architecture in the company's GPU products during 2013. GeForce notebook revenues increased due to the successful launch of Kepler-based Ivy Bridge platform. Strong demand for Kepler-based GeForce desktop GPU products also contributed to the increase in GPU business revenues. The GPU business also benefited from an increase in the Tesla's revenue by 36.0% in the fiscal year 2013.
Similarly, Tegra Processor business revenue also increased by 29.3% to $764.4 million in 2013, as compared to $591.2 million in 2012. This increase was primarily due to the higher sales of the company's Tegra 3-based smartphones and tablet devices. The company introduced its Tegra-3 based processors in Windows RT-based tablet devices during the fiscal year 2013. Moreover, revenues derived from the sales of embedded products for entertainment and automotive devices also increased during the fiscal year 2013.
In the year FY12, NVIDIA's Tegra Processor business revenue increased by a whopping 199.2% on a year-on-year basis. This increase in revenue was primarily driven by the accelerating demand for its Tegra 2 smartphone and tablet products in the mobile market. The increase in embedded product revenues was primarily related to the entertainment markets.
The company's gross margin increased to 52.0% in FY13 from 51.4% in FY12. The improvement in gross margin was primarily driven by the increase in the number of units sold and a better product mix of its high-end GeForce desktop products plus its Tesla and Quadro products. The addition of a full year's revenue generation from the patented cross licensing arrangement with Intel as compared to 10 months in 2012 also contributed to the improvement in the gross margin. Operating margins were hurt by the higher research and development costs and increased compensation and benefits expenses.
The analysis clearly shows that the company's growth potential has not been fully priced in NVIDIA's current price. The company is undervalued against the industry average in terms of all valuation metrics except P/CF. The current price multiples indicate that the company is undervalued against the industry and has a growth potential of 16.42%.
Market Focus and growth opportunities
After the downfall of the semiconductor industry, which hurt the company's revenues and margins substantially over the past few years, the company is recovering quickly. NVIDIA took steps to diversify its product portfolio, which enhanced its growth opportunities. Advanced visual computing opened a lot of growth opportunities for the company, thanks to the high definition PC games, independent software vendors, tablets and mobile phones and, most recently the cloud.
Gaming - With the rising number of new platforms, consoles, portables, online gaming, tablet and smartphones, the growth in the gaming industry seems quite promising. Since FY10 this segment has grown at a CAGR of 9%. The company has been focusing on opening platforms, which include PCs, mobile devices and most recently, the cloud. The company has developed processors to deliver the best graphics for a great gaming experience, sophisticated 3-D software and algorithms that are incorporated into games, and a new visual computing appliance that allows games to be played remotely from the cloud. The company's recent development of Project SHIELD, an Android gaming device featuring the Tegra 4 processor, is a new addition to the gaming world that helps users enjoy the digital content in the cloud.
Enterprise - With the advancement in the technology used in almost every industry, the demand for the company's enterprise products is likely to growth in multiple folds. As you know that visual computing is becoming vital to enhancing productivity in many large and important industries like Design and Manufacturing; including architectural design, consumer-products manufacturing, medical instrumentation, and science and aerospace, Media and Entertainment; including special effects for movies and television, advertising, and virtual sets for broadcast, High Performance Computing; aerospace simulation, molecular dynamics and bio-science simulations of viruses, oil and gas exploration, Virtual Desktop Infrastructure (VDI), professional applications for design, enterprise applications for power and productivity users in the workplace, working on such devices as tablets and notebook PCs.
Mobile - Mobile computing devices have shown tremendous growth over the past few years. In fact, mobile computers are spreading faster than any other consumer technology has in the past. According to Strategy Analytics, more than 800 million smartphones and 180 million tablets are expected to be shipped in 2013, approaching the number of laptop PCs sold. The foundation of its mobile computing strategy is the Tegra processor, which grew at a CAGR of 32% during FY11-FY13. In just a few years, the company has established a presence in the industry. The company's product range is not only restricted to smartphones, rather NVIDIA is working on the new products to be marketed soon, like smart TVs that respond to voice and gesture commands, smart monitors powered by Android making a PC optional, watches and jewelry that recognize voice commands and make calls.
Cloud - As you know the computer industry has undergone several major industry shifts - from client-servers, to PCs, to mobile devices connected to the Internet. But none appear to be as comprehensive as cloud computing. By extending visual computing into the cloud, NVIDIA is expanding the application of the GPU beyond the PC into the server and datacenter. NVIDIA's GRID visual computing appliance is a first of its kind, designed to let users interact remotely with graphics-intensive applications for entertainment and business purposes.
The company has developed a strong product portfolio to capture a larger share of the high growth market it is operating in. The addition of the Shield, the fully integrated GRID and the introduction of the Tegra 4 processor make this company stand out in the industry as it prepares itself to capitalize on the huge growth opportunities in the near future. Moreover, the recent increase in the dividends paid out by the company and the share repurchased signal the company's confidence in its future and its financial strength. Also, the company is undervalued, based on multiples, which favors putting money in this stock. I believe that this stock is a good investment opportunity for both value and growth investors and hence, I would give a buy recommendation for this stock.