Nvidia's Earnings Preview: PC Gaming, Tesla And Tegra Processors Will Drive Growth

May. 6.14 | About: Nvidia Corporation (NVDA)

Nvidia (NASDAQ:NVDA) witnessed a 3.5% decline in its fiscal 2014 revenue as strength in its high-end GeForce GPUs, Quadro, Tesla and Tegra for automotive products was partially offset by a decline in the desktop PC and notebook markets. The Tegra tablet/smartphone processor product transition, along with declining PC shipments, negatively impacted Nvidia’s top line growth in the first half of fiscal 2014. However, despite lower PC shipments, Nvidia’s leadership in visual computing, gaming and professional graphics, as well as its positive performance in data center, fueled growth in the latter part of the year.

The company had scheduled its fiscal Q1 2015 earnings report for May 8th. However, just as we go to press with this preview, the company has released an abbreviated earnings report after mistakenly distributing a a draft release to 100 employees. (Nvidia Abbreviated Early Earnings Release) At $1.1 billion and 24 cents, both revenues and earnings were better than expected. We will go ahead and share our preview with you and follow up with a post view analysis after they fully report earnings and brief us on the call as scheduled.

Below are key factors that we believe will drive Nvidia’s growth in fiscal 2015 and beyond.

Our price estimate of $17.17 for Nvidia is at a marginal discount to the current market price. We will update our valuation after the Q1 2015 earnings release.

High-End PC Gaming To Drive Nvidia’s Growth

During the UBS Global Technology Conference in December 2013, Nvidia declared that the primary reason 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 gaming, PC gaming, professional visualization and design, high-performance computing, and big data analytics.

PC gaming represents almost 40% of the worldwide gaming market, which is higher than consoles, phones, tablets or any other individual gaming segment, and we believe it will continue to drive Nvidia’s GPU shipments. [1] The PC platform is the only open-platform for gaming and GeForce is very strong in that segment.

Nvidia believes that the strong growth in high end-gaming was the primary reason that its Q4 2014 revenue came in well above its estimate. The company witnessed a 50% growth in its GeForce, GTX and GPU sales as the business benefited from the launch of several graphically intensive games including Call of Duty: Ghosts, Assassin’s Creed IV: Black Flag and Batman Arkham Origins.

Tesla To Drive Growth In The High Performance Computing Market

The release of the Kepler-based GPUs last year has fueled Nvidia’s growth in professional graphics and translated into higher market share and margins for the company. Accounting for 80% of the market, Nvidia remains the dominant player in professional GPUs. The company claims to have started its fiscal 2015 with a 64% share of the PC discrete graphics market, 81% of workstation graphics units and Tesla in pilot projects at 44% of all HPC sites. [2]

Nvidia recently was showcased at a Supercomputing industry event with its Tesla GPUs in a Twitter (NYSE:TWTR) Big Data analytics deployment. More notably, in December 2013, Nvidia announced that IBM (NYSE:IBM) will include Tesla accelerators in its its next generation supercomputers and will be developing accelerated versions of IBM enterprise software applications with Nvidia CUDA GPUs. IBM dominates the commercial end of the Supercomputing market. According to IDC, 32% of all HPC computing systems are IBM implementations. [2]

Expanding Market For Tegra Processors; Revenue Growth To Re-accelerate in Fiscal 2015

Nvidia’s Tegra processor revenues declined significantly in the first half of fiscal 2014. Much of the decline can be attributed to the ramp down of Tegra 3 products and the company’s conscious decision to delay the launch of Tegra 4 by one quarter, in order to pull up the production of Tegra 4i chips. However, Nvidia witnessed 110% and 18% sequential growth in Tegra processor revenues in Q3 2014 and Q4 2014, respectively, as it saw a rising number of Tegra-4 powered devices hit the market.

The company scored its first significant design win for the Icera 500 modem with Microsoft’s (NASDAQ:MSFT) 4G enabled version of the Surface 2 tablet, in March 2014. Though the Surface tablets are yet to make a significant penetration into the tablet market, it is an important technical win for Nvidia. The addition of Surface 2 tablet further expands the list of devices powered by Nvidia’s modem technology, such as the Tegra NOTE 7 LTE tablet platform and smartphones with Tegra 4i, such as the LG (LG) G2 Mini and Wiko WAX.

In addition to tablets and smartphones, the company aims to expand its reach to other large markets where visual computing matters, such as auto navigation systems, TV set top boxes and new desktop form factors like all-in-ones, clip-ons and smart monitors. Tegra 4 also powers Shield, Nvidia’s maiden attempt as a gaming hardware provider, which pitches it against console makers like Sony (NYSE:SNE) and Microsoft.

We forecast Nvidia’s Tegra processors revenue to cross $1 billion over our forecast horizon.

Notes:

  1. Nvidia’s CEO Discusses F3Q 2014 Results – Earnings Call Transcript, Seeking Alpha, November 7, 2013
  2. Nvidia’s CEO Discusses F4Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014

Disclosure: No positions