Nvidia Corporation (NVDA) is one of the leading designer of graphics processing units (GPUs) for smartphones, tablets, PCs, and the high performance computing space. The company's shares are trading at $12.26, just 7% off of their 52-week low, and I believe at these levels the company's shares have tremendous upside and limited downside for the following reasons:
1. Excellent balance sheet
The company's sitting on $3.13B in cash or cash equivalents and a mere $20.83M in debt, for a net cash position of ~$3.1B. This comes out to ~$5/share, or 40% of the company's market cap.
However, as was pointed out in this excellent article by a fellow Seeking Alpha contributor, Nvidia's share count has been seeing significant dilution over time due to stock-based compensation. The author of the above article feels that Nvidia should repurchase shares to counter this dilution, but I am against that. It is my belief that company should keep the cash for acquisitions and increases in R&D as the company continues to attempt to move into other areas beyond PC graphics chips.
2. Strong competitive position in PCs
Nvidia is one of two vendors (the other is Advanced Micro Devices (AMD)) of discrete graphics chips for laptop and desktop PCs for gaming use. In this space, Nvidia leads with 61.9% market share compared to AMD's 37.8%. Nvidia lost some share to AMD in Q1 since AMD was able to roll out their entire 28nm lineup during the quarter, whereas Nvidia is still rolling out their 28nm cards based on its "Kepler" architecture, which is praised for its power efficiency and performance relative to AMD's offerings by top hardware review sites such as Anandtech and Tom's Hardware.
I suspect that as more cards based on the "Kepler" architecture are released, Nvidia will be able to take market share. And since "Kepler" is significantly smaller than its 40nm "Fermi" predecessors, margins will continue to improve as the 28nm process at Taiwan Semiconductor Manufacturing Corporation (TSM) improves.
There are concerns that discrete graphics will continue to shrink in the face of more competitive integrated solutions from both AMD and Intel (INTC). In fact, according to this report, discrete GPU shipments are down 11% year on year (but up 2.7% sequentially). However, it is interesting to note the following statement from the latest conference call:
"We'll be instituting more Kepler GPUs in the coming quarters. Demand is high for Kepler and although supply will continue to improve, we are not able to meet all our OEM and channel demand in Q2. We do not expect the 28-nanometer supply situation to resolve itself until later this year. This is factored into our current outlook. At this point, we can sell everything we can get."
I suspect the low performance/low margin discrete products will eventually be rendered obsolete by integrated solutions, if they aren't already, and I further suspect that this phenomenon accounts for the drop in discrete card shipments on a year on year basis. The higher performance/higher margin products are likely to be safe for a good while, and fortunately the market is still apparently very strong for these products.
3. Growth in smartphones and tablets
Smartphones and tablets are understandably the most interesting space to examine when it comes to growth. Looking at the numbers, revenue for Nvidia's Tegra line were up a modest 8% to $132M from $122M. However, I believe that there is significant room for growth in the current year as Tegra 3 sees greater adoption, especially since the Tegra 3 is built on a power optimized 40nm process and not 28nm process that is in short supply across the industry.
Looking ahead, though, Nvidia has a significant advantage if it can aggressively leverage its graphics expertise on the mobile side. Excellent developer relations and years of designing high performance gaming graphics chips could prove to be a valuable competitive advantage here, especially with the company's focus on power efficiency in their latest "Kepler" graphics chips.
The competition here is fierce, though. Qualcomm (QCOM) and Texas Instruments (TXN) have significantly more design wins in the mobile space at the moment. Qualcomm's "Krait", in particular, is very competitive with both its custom CPU and GPU solutions. Intel is also throwing its hat in the ring with their "Medfield" SoC and its successors. Nvidia should be able to gain market share going forward, though, and it will be interesting to see how the next generation "Tegra 4" holds up against its peers.
4. Professional Solutions
An interesting segment is the "professional solutions" which consists of high performance discrete GPUs with additional workstation/server/HPC oriented features included. Despite the modest year on year increase in revenue from $201M to $212M in the most recent quarter, I believe that the opportunity for significant growth is present as more of these professional applications become optimized for the extremely parallel nature of GPUs. Applications in computational chemistry, molecular dynamics, visualization, fluid dynamics, structural mechanics, and many other complex applications will be well suited to take advantage of the GPU. With proper software support, it will make more sense on a performance per dollar and performance per watt basis to use general purpose GPUs than traditional CPUs.
Another important factor here is that the Telsa/Quadro solutions use the same silicon as the GeForce counterparts, but they cost significantly more. This means that the increase in R&D for these prodcuts is mostly subsidized by the consumer
5. "Project Denver"
Nvidia is currently designing its own high performance CPU core based on the ARM instruction set called "Project Denver". Nvidia intends this core to be used in everything from ARM based laptops and desktops to high performance compute applications. If the ARM editions of Windows really take off, and if the CPU provides compelling high end performance, then this could be a significant revenue and profit driver for the company by getting the company into a number of new, high margin segments.
Disclosure: I am long NVDA.
Additional disclosure: I may add to my position within the next 72 hours.
