Why Nvidia Is Heading To $22

May. 9.14 | About: Nvidia Corporation (NVDA)

Summary

Following the recent retreat, the stock is worth a gamble here for the long term.

The risk-reward trade-off favors the upside.

If Nvidia can maintain revenue growth rate of 10% for the next couple of years, this company can become a legitimate competitor to Qualcomm and Broadcom.

With the ongoing struggles in the semiconductor industry, it continues to amaze how chip giant Nvidia (NASDAQ:NVDA), which has performed above expectations, can never be given the benefit of the doubt. Despite having shown a track record of consistent outperformance, the company is always discussed in the context of management's ability to change its chip strategy.

But the numbers have shown that the transition away from the a PC-dependent business is on, if not ahead of schedule. And it continues to be a mistake to assume that Nvidia will never emerge on to the mobile stage with market leaders Qualcomm (NASDAQ:QCOM) and Broadcom (BRCM). And following Nvidia's first-quarter earnings beat, investors would do well to not underestimate one of the best managed companies on the market.

Revenue jumped 16% year over year to $1.1 billion, which easily beat Street estimates. The company enjoyed a solid performance from its core PC graphics processor segment, which posted a 14% year over year jump in revenue to $898 million. This occurred even amid the persistent slowdown in the personal computer market. Nvidia has been able to offset declines in its notebook market shrank with strong-than-expected demand for its advanced graphics chips. These are the types that are in high-end notebooks, which posted growth due to its gaming features.

Even more impressive was the 35% jump in revenue from Nvidia's Tegra processor business, which grew to $139 million. This is an important business for the company, which shows that meaningful progress is being made in the realm of mobile gadgets and automobiles. Recall, two months ago, Nvidia showed off a self-driving Audi that was powered by a Tegra processor. And now the company's Tegra line of chips are powering thing like entertainment and navigation systems in cars made by (among others) Tesla (NASDAQ:TSLA).

From an operational perspective, gross margin rose both sequentially and year over year, leading to an 83% year-over-year jump in profits and an 85% jump in earnings per share. With strong expense controls, which lead to a 4% decline, management achieves a gross margin of non-GAPP 55.1%.

All told this was by-far the best performance among all of the chip names. But investors weren't pleased with what management had to say about guidance, including seasonal weakness in demand for graphics chips, those used in low-end laptops. Management projected a second-quarter GAAP gross margin of 53.7 percent and non-GAAP gross margin of 54 percent. But I don't think it's time to panic.

Amid all of the PC-related doom, which continues to weigh on rivals including Intel (NASDAQ:INTC), Nvidia delivered as solid a performance as could have been expected, beating estimates on revenue and earnings per share. Not only is Nvidia's Tegra line of chips gaining traction, but the costs to grow market share have not adversely impacted the company's operating margin.

Also encouraging is the fact that Nvidia continues to secure business from Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) where the Tegra is a key component inside their respective devices. Device manufacturers have embraced that Tegra's features such as low power consumption coupled with high performance makes this series one of the best chips on the market today and well into the future.

From my vantage point, if Nvidia can maintain revenue growth rate of 10% for the next couple of years, while also growing its Tegra market share, this company can become a legitimate competitor to Qualcomm and Broadcom. Accordingly, with the stock trading at around $18 per share, I project fair value to reach $20 to $22 in the next 12 to 16 months. Following the recent retreat, the stock is worth a gamble here for the long term. The risk-reward trade-off favors the upside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.