Seeking Alpha
Long only, short only, growth at reasonable price, contrarian
Profile| Send Message|
( followers)  

The success of technology companies is highly dependent on their ability to be innovative and consistently identify new business opportunities to expand their business operations and diversify their risks. Nvidia (NASDAQ:NVDA) has pioneered the art and science of visual computing and is transforming the world of displays into a world of interactive discovery for everyone, from gamers to scientists and consumers to enterprise customers. As the top supplier of computer graphics processing units (GPUs), the company is constantly focused on product innovation and expansion in order to win the supremacy battle of Advanced Micro Devices (NYSE:AMD).

Earning Preview

The company reported revenues for fiscal year 2014 of $4.13 billion down 3.5% from $4.28 billion in the previous year. Revenue for fiscal year 2014 was led by strength in its high‐end GeForce GPUs, Quadro workstation, Tesla high‐performance computing, and its Tegra automotive products. These growth areas were offset by a decline in the market for desktop PCs and notebooks that caused lower volumes for its mainstream GPUs. The conversion from its Tegra 3 generation to its Tegra 4 generation of products also contributed to the decline.

Its GPU business grew $216 million or 6.6% over the prior fiscal year fueled by growth in its professional workstation and high performance computing products as well as its GeForce GPUs. The overall PC market decline in 2013 contributed to lower volumes of its mainstream category of GPUs for desktops and notebooks.

On other hands, the company's Tegra processor business decreased by $366 million due to decreases in its Tegra 3 line of smartphones and Android and Surface tablets. These declines were partially offset by the strength of its growing line of products for Tegra 4 smartphones, tablets, and other devices as well as infotainment systems for automobiles.

Tegra 4 Advantage

Nvidia's Tegra 4 has advantages in terms of performance but because of its high price most brand vendors have turned to solutions from China-based makers or MediaTek (OTC:MDTKF) that offer strong performance/price ratios. Currently, the Tegra 4 is mainly focusing on mid-range and high-end markets but in February 2014, Nvidia introduced Tegra 4i, its first fully integrated 4G LTE mobile processor, to expand its presence in the smartphone market. Offering higher bandwidth and faster data transmission, 4G/LTE is the future of wireless connectivity for mobile devices, especially smartphones. Of the various technologies that are currently driving the market, LTE has seen the strongest growth, as carriers around the world are increasingly shifting to the new standard for wireless communication.

Tegra K1

The company's latest Tegra K1 mobile processor, powered by Keplar technology, is a new chip that features next-gen PC gaming technologies that will enable PC and console game developers to build apps that can run not only on smartphones and tablets but also on televisions, consoles, and cars. In addition, this chip is available in two versions: a 32-bit version and a 64-bit version that deliver vivid graphics and a faster experience for GPUs. Therefore, the adoption of Tegra K1 will boost the company's business.

Tegra chips are increasingly being used in Google (NASDAQ:GOOG) Nexus 7 and Microsoft (NASDAQ:MSFT) Surface tablets. The introduction of the latest chip for the mobile market will lessen its dependence on the PC market and will help the company to achieve higher growth in coming years.

Investing in the Future

Supercomputing Technology with Tegra K1

In order to diversify and expand its business operations the company made some serious bets on future technology. Nvidia introduced supercomputing technology into cars with its Tegra K1 a revolutionary mobile processor will allow self-driving cars to become mainstream. This is the first mobile processor technology that will bring advanced computational capabilities to the car that had previously not been possible with such low power consumption. Tegra K1 will drive camera-based, advanced driver assistance systems (ADAS) and can also monitor driver alertness through a dashboard-mounted camera. Specialty analytics expect the market for Advanced Driver Assistance Systems to be worth around $15 billion by 2016 with a CAGR of 23%. Nvidia is in a strong position to leverage this growth.

Targeting Automotive Industry

The company is also targeting automotive industry to expand its addressable market for Tegra. Recently, the company announced Tegra-based technology as a part of the new Audi (OTCPK:AUDVF) line-up of vehicles, for a complete infotainment and navigation system.

Audi also launched a new category of mobile device, known as Smart Display. This multimedia computer powered by a Tegra 4 processor is designed for rear-seat use, yet seamlessly integrates with the car's audio and video systems. It has been hardened to withstand a wide range of operational conditions from -40 degrees Celsius to 80 degrees Celsius and to withstand the shocks and vibrations that driving conditions can present.

Currently, there are more than 4.5 million cars on the road powered by Nvidia processors including the newest models from Audi, Volkswagen (OTCPK:VLKAF), Skoda, and SEAT. The addition of this technology will help the company to strengthen its market position in this fast growing segment.

High-End PC Gaming to Drive Nvidia's Growth

During the UBS Global Technology Conference in December 2013, Nvidia declared that the primary reason that it has managed to outpace the PC market is that it does not, and has not ever, addressed the bottom 70% of the market. Its main focus has been on those vertical segments within a broader computing market where visual computing matters the most including console gaming, PC gaming, professional visualization and design, high-performance computing, and big data analytics. This is the reason the company outperformed the PC market over the past few years.

Tegra 4i Wins the Latin American Version of the LG G2 mini

The fruits of Nvidia's effort in the smartphone industry are finally beginning to pay off after the company won the LG (OTC:LGEAF) G2 mini smartphone. The Latin American LTE version will sport an Nvidia Tegra 4ithat integrates four ARM Cortex A9 CPUs and Nvidia's GeForce ULP GPU. Tegra 4i is notably faster than Qualcomm's chips that are used in LG's G2 version of the smartphone but it seems that LG was more comfortable with having Qualcomm's (NASDAQ:QCOM) chip in the rest of the markets because Nvidia relatively unproven in the smartphone market. Nvidia's future depends on this deal with LG because once everything goes smoothly there will be a higher chance that LG will expand its relationship with Nvidia, testing its Tegra 4i in its other products as well.

Bottom Line

It is obvious that the growth is inevitable and the expansion in its Tegra 4 line-up will accelerate revenue growth for the company in 2014. With the release of its Tegra 4i the company will expand its total addressable market to more mainstream handsets. This drives an incremental revenue opportunity, and most importantly, gives investors a reason to be confident that the hefty investment in Tegra will pay off soon. Moreover, the deal with LG will give the company a new direction towards growth once its Tegra 4i successfully passes the "test drive" phase and success of this deal will not only boost LG's confidence but will also increase other smartphone vendors' confidence in Nvidia's capabilities.

Source: Nvidia: A Decent Growth Stock To Own