Tegra Might Put A Tiger In Nvidia's Tank In 2014

Dec.15.13 | About: Nvidia Corporation (NVDA)

The data keep coming in a getting better for Microsoft (NASDAQ:MSFT). The Surface 2 is pretty well sold out across the country with favourable reviews from all quarters. Even the New York Times thought it was newsworthy in its December 4, 2013 article "Microsoft Produces a Winner in Tablets".

Marketwatch ran a similar article December 12, 2013 entitled: "Microsoft's Surface 2 may be a holiday hit".

Microsoft seems to have cleaned up by clearing out its inventory of the original Surface at Best Buy on Black Friday where the $199 purchase price lured enough customers to make it the best selling product for the chain, beating out the 16GB version of the Apple (NASDAQ:AAPL) iPad 2 which was on sale for $299.

Strong sales of the Surface RT and Surface 2 are a likely tailwind for Nvidia (NASDAQ:NVDA) with is Tegra processor commanding center stage in the device. The Tegra line is a fast growing part of Nvidia and comprises a $723 million business in 2013, more than double 2012 levels.

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Tegra volumes have been steadily increasing, hitting a quarterly high of over 10 million units in Nvidia's fiscal 2013 third quarter.

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The success of the Surface 2 could mean even faster growth for the Tegra chips. Of course, Tegra processors power a lot more than Surface tablets. Nvidia Tegra's are found in the fast selling Xiaomi Mi3 which sold over 100,000 units in less than two minutes when launched; in Coolpads; Toshiba's (OTCPK:TOSBF); and devices from ZTE (OTCPK:ZTCOF), HP (NYSE:HPQ), Asus and Kobo.

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Nvidia likes to compare its Tegra processors with Qualcomm's (NASDAQ:QCOM) Snapdragon processors, seen by many as the industry standard in mobile. The comparison suggests Nvidia is competitive.

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Nvidia has a good handle on the rapidly growing smart device market in China. Chinese consumers put a high emphasis on price, processor performance, screen size and resolution and camera in selecting their smartphones. User interface and brand name are secondary considerations.

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As a result, Nvidia has emphasized top of the line performance at a mainstream price in its market positioning, putting itself head to head against Qualcomm.

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The results so far have been pretty impressive. Nvidia has delivered high double digit growth in revenue and earnings over the past 3 years.

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By offering a one-chip solution similar to Qualcomm, Nvidia has carved out a place in the smartphone market that merits watching.

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Often thought of as tied to the PC market by its history as a provider of graphics cards, many investors neglect the effectiveness of Nvidia's strategy to diversify away from the personal computer. Today, it is demonstrating a lot of success achieving not only reasonable growth in its GeForce graphics lineup but stellar growth in other products most notably the Tegra line all of which combine to yield a 20% compound average growth rate since 2010.

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This growth seems likely to continue. With Tegra processors priced competitively in the $20 range, and the prospect of high unit sales in a growing number of Tegra powered devices, the momentum seems bound to continue into 2014 and beyond.

Virtually debt free and with $3 billion in cash and short term investments, Nvidia trades at about 20 times 2014 estimated earnings. Most analysts forecast only modest growth and on that basis the stock looks expensive. I am more sanguine about Nvidia's prospects than most, and believe strong sales of the Surface 2 alone will give an unexpected boost to its near term sales and profits.

I don't currently hold any share of Nvidia but will very like add this to my portfolio on any weakness.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NVDA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.