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. However, the company regained its growth momentum in Q1 2015, reporting 16% and 75% (annual) improvement in Q1 2014 revenue and net income, respectively. The company remains focused on addressing the top 30% of the market, mainly those vertical segments within a broader computing market where visual computing matters the most. These include gaming, PC gaming, professional visualization and design, high-performance computing (HPC), and big data analytics. Indeed this focus has helped it outpace the PC market, where it has always had a significant exposure.
Strong performance in PC gaming, higher Tegra revenue and continued progress in the data center and cloud helped Nvidia beat both the company guidance as well as the consensus estimate in Q1 2015. We expect the above factors drove growth in Q2 2015 as well. The company will report its Q2 2015 earnings on August 7, and expects revenue of around $1.1 billion (+/- 2%) primarily impacted by seasonality in the consumer PC industry and strength in data center, CoD solutions and mobility.
Our price estimate of $18.43 for Nvidia is marginally higher than the current price estimate. We will update our valuation after the Q2 2015 earnings release.
Tesla And GRID To Drive Growth In Data Centers
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 approximately 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. [1]
Nvidia's data center strategy has two key components - Tesla GPU computing and GRID virtualization. It expects both platforms to accelerate its growth in the future. Tesla and GRID generate increasing revenue from compute acceleration opportunities, VDI deployments and streaming gaming, which has helped Nvidia expand its footprint in data centers.
In December 2013, Nvidia announced that IBM (IBM) will include Tesla accelerators in 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 Supercomuting market. According to IDC, 32% of all HPC computing systems are IBM implementations. [1]
Nvidia claims that the GRID trials continue to grow rapidly with nearly 600 enterprises worldwide evaluating the GPU server platform, up over 35% compared to the previous quarter. Many of the trials announced are turning into sizable pilots and many of those are in big blue chip and government accounts. Recently, VMware announced support for GRID to enable GPU-accelerated enterprise virtualization.
High performance computing has driven Tesla so far and Nvidia expects big data analytics to further add to the growth momentum in the future. With IBM, Dell (DELL) and HP (HPQ) now selling Nvidia GPUs in their high-volume servers, the company expects large-scale data centers to be a significant source of growth.
Expanding Tegra Revenue Base
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. With a 35% increase, Nvidia reported its third consecutive quarter of growth in Tegra revenue in Q1 2015. Nvidia witnessed 110% and 18% sequential growth in Tegra processor revenues in Q3 2014 and Q4 2014, respectively.
Nvidia scored its first significant design win for the Icera 500 modem with Microsoft's (MSFT) 4G enabled version of the Surface 2 tablet, in March 2014. The addition of the 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 G2 Mini and Wiko WAX). In May 2014, Xiaomi, China's biggest electronics company, introduced its first tablet (MiPad) based on Nvidia's K1 mobile processor.
In addition to tablets and smartphones, Nvidia 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. The company launched its new mobile gaming device (Shield Tablet) along with a wireless controller a few weeks back, with an intention to leverage growth in the Android gaming market, the world's largest operating system platform.
Nvidia derives 10% of its valuation from the Tegra division, as per our estimate. We believe that Tegra processors revenue will cross $1 billion over our review period, mainly driven by three key growth drivers - mobile devices, automotive electronics and gaming systems.
Disclosure: No positions.
