After starting the year on the front foot, chipmaker Nvidia (NASDAQ:NVDA) has lost steam in the past three months. Shares of the graphics chipmaker have increased just under 4% over the last three months and its recently released first-quarter earnings report didn't inspire much confidence either. Although Nvidia saw sales increase 16% year over year, along with a 61% jump in earnings, investors weren't convinced by Nvidia's performance although its outlook was in line with estimates. Nvidia has been trying to move into the mobile market, where chip giant Qualcomm (NASDAQ:QCOM) is already present. Hence, the company is up against solid competition, and a declining PC market is another point of concern.
Hence, should investors bet on Nvidia going forward? Or should they maintain their distance? Let's find out.
PC and Big Data driving growth
Nvidia is seeing good gains in PC gaming along with continued progress in the data center and cloud. Nearly 600 enterprises worldwide are now evaluating GRID, its virtual GPU server platform. VMware (NYSE:VMW) announced support for GRID to enable GPU-accelerated enterprise virtualization. The GPU major expects large-scale data centers to be a significant source of growth with IBM (NYSE:IBM), Dell, and HP (NYSE:HPQ) now selling its GPUs in their high-volume servers.
Nvidia's Tesla was in robust demand for high performance computing. Nvidia's footprint in the data center is increasing as Tesla and GRID generate revenue from acceleration opportunities, VDI deployments, and game streaming.
The GPU-based machine learning is already in active use or is being evaluated by many consumer Internet companies, including Netflix (NASDAQ:NFLX), Baidu (NASDAQ:BIDU), and Yandex (NASDAQ:YNDX). The first phase of Tesla's growth is being driven by high performance computing and this growth is expected to continue. And now, big data analytics are further driving Tesla's growth.
IBM has announced the incorporation of Nvidia's NVLink interconnect technology in its future POWER8 CPUs. The POWER CPU is poised to become a mainstream CPU through the OpenPOWER Foundation.
Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and NVIDIA are co-founding members of the OpenPOWER Consortium. IBM demonstrated GPU acceleration working in the IBM Java framework on a Hadoop-based analytics problem. The new product announcements from HP, Dell, IBM, and Cisco (NASDAQ:CSCO), the world's top three servers which are HP DL380p, Dell 720 and IBM x3650, are all now available with Nvidia Enterprise GPUs. Also, Nvidia GRID is now available in more than 50 server platforms from 18 OEMs or ODMs.
Targeting gamers and cars
The GeForce GTX 750 series of graphics card targets the entry PC gamer. It's quite popular among PC review sites. This chip is in full production and Nvidia is seeing strong demand. For high-end gaming, Nvidia announced its newest flagship GPU, the GeForce GTX TITAN Z, which is the highest performance graphics card ever designed by Nvidia and is expected to be available in Q2.
Nvidia says that notebook gaming has grown at a 51% CAGR in the last three years. Hence, Nvidia has launched a new family of notebook gaming GPUs, building on its gaming notebook momentum, including the first based on the Maxwell architecture. The performance, battery life and thin form factors of these notebooks lead to good demand in the end market. Nvidia's workstation business had another solid quarter and now has the highest market share level since 2010.
Also, there's an increasing interest from the automotive segment. Tegra showed its third consecutive quarter of growth powered by strength in automotive. Audi (OTCPK:AUDVF) launched its Tegra-powered A3 in the U.S. this quarter, and further sales are driven by Jetson TK1, a development platform aimed at automotive, embedded, and robotics applications.
But mobile might fail
Nvidia's mobile segment, represented by the Tegra processor business, grew 35% in the first quarter since last year, led by increased volumes for mobile and auto infotainment systems. The strong growth in smartphone chips and more than 60% growth in the auto business from the prior year drove Tegra mobile sales. The Tegra processor segment grew 6% from Q4.
While this growth in the Tegra business is no doubt impressive, Nvidia needs to keep a close eye on Qualcomm. Although Nvidia's latest Tegra K1 processors seems to be ahead of Qualcomm's Snapdragon 800 in terms of benchmark scores, Qualcomm is looking to up its game. Qualcomm recently released its Snapdragon 805 'Ultra HD' quad-core processor, which allows UltraHD video playback on tablets, smartphones, or Smart TVs.
Qualcomm is also supporting carrier aggregation with this chip. As reported by Engadget on the Snapdragon 805 --
The new processor will also come with the 28nm Gobi MDM9x25 modem announced earlier this year, in order to support LTE carrier aggregation (and the resulting higher speeds) and 150Mbps LTE 4. Another option will be a new LTE modem, the 20nm Gobi MDM9x35, which pairs with the WTR3925 chip to bring up to 300Mbps download speeds via LTE advanced. Qualcomm said that both chips support "all carrier aggregation band combinations approved by 3GPP" while enabling manufacturers to bring LTE devices to market faster. Finally, there's a new mobile camera processor that supports gigapixel throughput and gyro-based image stabilization, for smoother video recording and faster image processing. All of that will come in a package that consumes less power, according to Qualcomm, who added that owning a Snapdragon 805-equipped device will be like "having an UltraHD theater in your pocket."
In comparison, Nvidia's Tegra K1 isn't equipped with an LTE modem. The Tegra 4i is the mobile processor that comes equipped with an LTE modem. However, Nvidia has been late to the market with this chip, which will be used in LG's G2 Mini and Wiko Mobile's Wiko Wax. Both these phones aren't as popular as the Galaxy S5, for which Qualcomm supplies its chips.
Also, since Qualcomm has been offering integrated LTE modems in its Snapdragon chipsets for a long time now, and it is now looking to add more features such as 4K video, it is ahead of the curve when compared to Nvidia.
There's no doubt that Nvidia is seeing some strength in the PC business, but the bottom line is that the PC market is shrinking and Nvidia might not be able to sustain its growth in the long run. As such, the mobile market is quite important for it. However, with a well-entrenched player like Qualcomm already present, Nvidia will face some solid headwinds.
Also, Nvidia is expensive when compared to Qualcomm. Qualcomm trades at 20 times trailing earnings, while Nvidia is slightly more expensive at 22 times earnings. Moreover, from an investment point of view, Qualcomm is better with a dividend yield of 2.10% and an expected earnings CAGR of 15% for the next five years. In comparison, Nvidia carries a dividend yield of 1.90% and its earnings are expected to grow at just 8.73% for the next five years.
Hence, investors shouldn't expect too much from Nvidia, and instead focus on Qualcomm from a long-term perspective.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.