Nvidia's (NASDAQ:NVDA) Pascal architecture GPUs are unquestionably a hit for the company. The GTX 1080 and 1070 graphics cards continue to be in short supply and are often sold out or only available at a large premium over suggested retail. TSMC (NYSE:TSM) fabricates all the Pascal GPUs, and TSMC's monthly sales for June indicate that Nvidia's GPU revenue will get a huge Pascal boost.
Source: Tom's Hardware
TSMC's Very Good News
TSMC reported its monthly revenue for June, today, July 11. In US dollars at the current exchange rate, TSMC revenue was $2.523 billion, up 35.8% y/y. This was somewhat surprising considering that revenue since the beginning of the year had been down substantially due to stagnation at the high end of the smartphone market and slowing demand for Apple's (NASDAQ:AAPL) iPhone. Even with the boost in June, revenue for the first half of the year is still down 0.5% y/y.
The June revenue delta compared to last year is substantial, about $664 million. What can account for that delta? I think there are only three possible sources based on TSMC's major customers: Apple, Huawei and Nvidia.
TSMC is known to share fabrication of the Apple A9 custom SOC in the current generation iPhone 6s generation as well as be the exclusive source for the A8 processor in the iPhone 6 generation. TSMC also is thought to be the exclusive source for the A9X in the iPad Pro series. However, none of these products are expected to experience sales growth in the June quarter.
It's very possible that Apple may be ramping production of the A10 SOC for the iPhone 7 launch. This feels a bit early in the production cycle, but TSMC is considered to be the exclusive provider of the A10 this time around, and Apple may want to reduce risk due to having a single source. I believe this does account for some fraction of the $664 million revenue delta.
Another major customer is Huawei. Huawei's wholly owned subsidiary HiSilicon designs the Kirin series SOCs that Huawei uses in its top end smartphones such as the Mate 8. As I discussed in my recent article that looked at the Chinese smartphone market, Huawei is now the number one vendor in China and posted a substantial market share gain there, according to Strategy Analytics.
Huawei also is growing in terms of global sales. According to IDC's data for calendar Q1, Huawei's unit sales increased y/y by 58.4% to 27.5 million units. Although IDC hasn't published data for Q2 yet, it's likely that the growth continued into Q2.
Nvidia introduced the GTX 1080 and 1070 graphics cards in May, and TSMC is the sole source for the Pascal GP104 GPU used in the cards. The Pascal series GPUs are all fabricated using TSMC's latest 16 nm FinFET technology, so Pascal GPU sales would have contributed to TSMC's June revenue total.
Partitioning the Delta
With continuing scarcity of the cards, as well as the impending arrival of the value priced GTX 1060, it's very likely that Pascal has contributed to TSMC's June revenue growth. The difficulty is partitioning the impact of the three major TSMC customers on the June revenue delta.
My initial educated guess is that each contributed about a third of the delta, meaning that Nvidia paid TSMC about $200 million for GP104 GPUs in June. Based on the size of the GP104, reported by Tom's Hardware to be 314 mm^2, I estimate the TSMC selling price of the GP104 to Nvidia to be about $100/unit. So this works out to unit volume for the month of 2 million units.
An estimate of revenue that Nvidia derives from the Pascal GPUs can be obtained by dividing the $200 million cost by the company gross margin of 57.5% to yield an estimated revenue delta of $347 million. This is my initial estimate for Nvidia's revenue delta compared to last year.
For last year's fiscal 2016 Q2, which ended July 26, 2015, Nvidia reported revenue of $1.153 billion. Based on the above delta revenue estimate, I estimate that this year's fiscal 2017 Q2 revenue will be about $1.5 billion for a y/y increase of 30%.
Nvidia defines five key markets for its products: Gaming, Professional Visualization, Datacenter, Auto, and OEM and IP. Most likely, most of the revenue delta will be distributed in the Gaming and Datacenter categories.
I consider this a fairly conservative estimate for Nvidia based on the apportioning of the TSMC revenue delta. Assuming that Apple and Huawei took two-thirds of the TSMC June revenue delta is probably very conservative. It's not obvious that Huawei sustained the Q1 growth into Q2 since most of its new flagship phones were introduced late last year.
Likewise, it's not obvious that Apple has even commenced production of the SOC for the next iPhone (7). Based on past experience, a more likely start for the production of the SOC would be July. Last year, TSMC didn't begin the 16 nm FinFET production ramp until July. Offsetting this consideration is the fact that production of the A9 was shared with Samsung (OTC:SSNLF), but it's not clear when Samsung started work on its version of the A9.
Although my estimates are still a little fuzzy, I think the preponderance of the evidence says that this is going to be a very good quarter for Nvidia. Nvidia has hit products in the Pascal series GPUs. Nvidia's key supplier, TSMC, has posted a huge revenue bump on the heels of the Pascal roll out.
Nvidia has had a month of lead time on its main graphics rival, AMD (NASDAQ:AMD). In addition, Nvidia has benefited from AMD's bungled launch of the Rx 480. This will probably boost sales of the GTX 1060, which will contribute to revenue for the fiscal quarter that will end at the end of July. I remain long Nvidia and recommend it as a buy.
Disclosure: I am/we are long AAPL, NVDA.
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.
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