Automotive, Tablet Gaming, And Servers Can Power Nvidia Beyond 52-Week Highs

Sep. 4.14 | About: Nvidia Corporation (NVDA)

Summary

Nvidia is outperforming the market as its products are gaining traction in several end-markets.

Nvidia will benefit from growth in tablet gaming and increasing virtualization.

Nvidia's foray into automotive should allow it to profit from the increasing adoption of in-car infotainment systems.

Nvidia has got strong fundamentals and this is another reason why it looks like a good pick.

Chip maker Nvidia (NASDAQ:NVDA) is doing well in 2014, gaining 23% so far and outperforming the NASDAQ Composite index by a wide margin. This is not surprising if we look at Nvidia's end-markets, which are growing on the back of improving demand for its graphics processing units in PCs and the expanding application of its chips in the automotive markets.

As such, when Nvidia released its second-quarter results, it reported robust growth and outperformed consensus expectations handsomely. The company's revenue grew 13% year over year, and its guidance of $1.20 billion in revenue for the current quarter was well-ahead of the $1.16 billion consensus estimate. Nvidia's non-GAAP diluted EPS of $0.30 in the second quarter also increased from $0.23 per share last year. Looking ahead, there is a good chance that Nvidia's performance will continue getting better on the back of new product introductions and an increase in its addressable market.

GPUs gaining traction

The company is seeing robust demand for PC gaming GPUs, along with demand in data centers and cloud platforms. PC gaming is progressing well, driven by its GeForce GPUs. To sustain its momentum, Nvidia recently introduced an entry-level GeForce GTX GPU, which delivers a superior performance on the latest generation consoles. The company believes that this will allow the GeForce gaming PC to become the prime target for the game developers.

Moreover, the gaming PC market is expected to grow at a good pace going forward. According to Statista, the global PC gaming hardware market will be worth $20.77 billion in 2016, up from $17.79 billion at the end of last year. Thus, new product introductions will allow Nvidia to continue tapping this market going forward.

The workstation segment is also progressing well for the company. For instance, Adobe (NASDAQ:ADBE) is using GPUs in the workstation and server segment. Adobe is accelerating the usage of Adobe Illustrator CC. Moreover, Nvidia's Tesla GPUs are witnessing healthy momentum. Driven by machine learning and data analytics, with robust purchases from consumer web companies for voice processing and images, Nvidia's Tesla is growing.

According to management, numerous OEMs have decided to ship Tesla-based servers along with ARM64 SoCs, which were earlier aimed at micro web services. These GPUs will now enable customers to handle high-performance computing workloads and enhanced their market opportunity.

In addition, Nvidia's GRID is also gaining traction. The company has launched GRID Test Drive to assist enterprise IT professionals with their virtual desktop infrastructures. These new service has attracted over 10,000 users during the initial two months. GRID is increasingly gaining popularity among companies looking to virtualize PC and workstation applications.

For instance, Turkish Aerospace has upgraded its design team using GRID; Roger Williams University is working on allowing its students to utilize the huge campus for architecture and 24x7 engineering applications. Also, Daewoo Shipbuilding is increasing the number of engineers capable of collaborating live on their cloud-based system, all driven by GRID.

Focus on gaming tablets

At the same time, Nvidia hasn't lost sight of the tablet market. It has launched the SHIELD tablet, the next member in the SHIELD family. Additionally, over 400 games have been optimized for touch and controllers on Tegra, and several others are leveraging the power of the Tegra K1. For instance, the SHIELD tablet comes bundled with Frozenbyte's Trine 2, a PlayStation 4 game. Also, both Portal and Half Life 2 from Valve software have been developed in accordance with the Tegra K1.

Gaijin Entertainment is about to launch War Thunder on SHIELD, which will lead to the introduction of a massively multiplayer combat game on Tegra, PC, and PlayStation 4. Like the GeForce GPUs on Windows, Nvidia's strategy regarding SHIELD is to develop the finest gaming platform on Android. At present, Tegra K1 runs several desktop-class engines such as the Unreal Engine 4, together with Source, Unity, and CryEngine. This will make it simpler for developers to introduce games to Android on the Tegra K1.

With this strategy, Nvidia is moving in the right direction, as gaming is increasingly moving to mobile devices. According to a report:

"Market intelligence firm Juniper Research says in a recent report that smartphones and tablets are going to be primary device for gamers to make in-app purchases in the future. Juniper projects 64.1 billion downloads of game apps to mobile devices in 2017, compared to the 21 billion downloaded in 2012.

According to TechCrunch, Juniper believes mobile hardware "will become the primary screen for gamers." Juniper says that will happen with growing numbers of "sophisticated games, which allow for truly multi-platform gameplay through the use of cloud technology," according to report author Siân Rowlands."

Automotive growth in the cards

The automotive business of Nvidia increased more than 70% on a year-over-year basis last quarter, and the trend looks set to continue. Volkswagen (OTCQX:VLKAY) will use the Tegra chip in the forthcoming Passat to power its infotainment system. Its Golf hatchback is already using Tegra chips, while the production of the new GT, which will utilize two Tegra chips, has already started in Europe.

Meanwhile, the infotainment system in Audi's A7 sedan also uses Tegra, coupled with the usage of the Visual Computing Module. More importantly, Tegra is powering BMW's i3 and i8. Looking ahead, Nvidia is focused on leveraging its Tegra chips to power entertainment and navigation systems in cars manufactured by companies such as Volkswagen, Audi, BMW, and Tesla.

Driven by such key clients, Nvidia will be able to tap a growing automotive infotainment market. According to Markets and Markets, automotive infotainment is expected to grow at a CAGR of 12.1% from 2011 to 2016, hitting a size of $14.4 billion. As such, Nvidia is making the right move by targeting this market with its Tegra chip.

Valuation and fundamentals

Apart from having sound prospects, Nvidia also has an attractive valuation. The company has a trailing P/E of 23, and it has a forward P/E ratio of 18. This means that Nvidia's bottom line growth is expected to continue going forward. The stock also carries a dividend yield of 1.90%, and since it has a payout ratio of only 37% and strong cash flow, the dividend could grow in the future.

Nvidia also has relatively low debt of $1.39 billion as compared to a cash position of $4.39 billion. Its current ratio of 6.19 indicates strong liquidity. Thus, Nvidia has a lot of strong points that make it a stock worth considering, even though it is trading at the higher end of its 52-week range.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.