Nvidia (NVDA) is a PC Graphics company that is trying to grow into mobile. The costs that are associated with bringing the Tegra processor and Icera basebands to market are not insignificant.
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Note: Data from company's earnings releases and 10Qs and 10Ks.
It takes a lot of money to bring new products to market in the semiconductor industry. Especially against worthy entrenched competitors such as Qualcomm (QCOM) and Texas Instruments (TXN) in mobile application processors and Broadcom (BRCM) and Qualcomm in baseband processors. Nvidia also competes with Advanced Micro Devices (AMD) in discrete GPUs and Intel (INTC) with their integrated graphics in their microprocessors.
The bottom line is non-GAAP operating expenses have risen sharply in the last 7 quarters from $288.3M in the Oct. 2010 quarter to $348.0M in April 2012 Quarter. This was OK when the top line revenue was growing at a good clip...Oct. 2010 quarter to Oct. 2011. Obviously, the company decided to keep spending on new products during the PC hard drive issues caused by the Thailand Floods and the transition from Tegra 2 to Tegra 3 in mobile.
So what early indications are there for the top line revenue to get back on trend starting in the July 2012 quarter?
Indicators:
1) Nvidia is back in the Apple (AAPL) MacBook Pro laptops as of Monday, June 11th. This is a huge win for Nvidia because it puts to bed the idea that Intel Ivy Bridge integrated graphics are good enough for decent mainstream notebooks (especially notebooks with high resolution displays) and the idea that discrete GPUs cannot fit in ultrathin form factors. Perhaps later this year when Apple updates the iMacs and MacBook Pro desktops Nvidia will gain those slots too. Note: Apple has a history of switching back and forth between AMD and Nvidia for their discrete GPUs...sometimes based on price and sometimes based on performance. If it's performance, this time Nvidia will win. Note: Nvidia has stated they have 240 discrete GPU design wins on Ivy Bridge notebooks vs. 200 on Sandy Bridge notebooks. In addition, Nvidia's GTX670/680 Gamer GPUs are a run away success.
2) Google (GOOG) will be launching a tablet at their Google IO conference at the end of June to compete with the best selling Amazon (AMZN) Kindle Fire in the low cost tablet market. Rumors abound that Tegra 3 is the processor and ASUS is the manufacturer. It's a good fit with the facts. Nvidia has announced their 7 inch low cost tablet platform 'KAI' with the target on the shelf price of $199 and Tegra 3 is the processor in ASUS's Transformer Prime tablet. Of course, the price could go up or down a few dollars based on screen resolution and amount of memory. Plus, the Fall launch of Windows RT tablets. Note: ASUS and Nvidia highlighted a product preview at Computex June 4th.
3) Icera software modem passed LTE qualification at AT&T (T) last month. No product launches yet but LTE qualification is an important first step. Nvidia has stated that stand alone Icera LTE modem chips will be in production this year and will be integrated on the same chip with Tegra processors next year. Note: if I could highlight one thing that has held Nvidia back in mobile it's the fact that Qualcomm's processor (MSM8960 Snapdragon) with an integrated 3G/4G LTE modem is the go to chip for use on LTE networks. With an ICERA software modem with LTE and 3G, Nvidia will finally be able to compete on the merits of their Tegra application processor for cell phone slots in the US.
4) 30 Tegra Smartphone design wins in production in 2012 vs. 15 for 2011 per the company's analyst day presentations last month. Tegra 3 is currently shipping in HTC One X worldwide except US and LG 4X HD is shipping in Europe. ZTE has announced two models with Tegra processors for the 2nd half of 2012. Note: Nvidia has stated that they did $360M in Tegra sales in 2011 and expect at least 50% growth year-over-year in 2012.
5) Kepler Graphics will be in pro graphics GPUs and Tesla High Performance Compute GPUs later in the year. They are powerful enough to cause customers to upgrade. In fact, the Oak Ridge National Laboratory has already contracted for 18,000 Teslas to be installed with their planned new 20 Petraflop supercomputer. Note: This business unit has operating margins of 40% and quarterly sales of $213M in the April quarter.
Conclusion
There is no doubt that Nvidia has chosen to target mobility for good reason, i.e. the explosive growth of smartphones and tablets. The hard part is they are taking on a veritable who's who of the semiconductor and communication device industry to achieve their goals. To move the stock price appreciably up will take top line revenue and earnings growth again. Nvidia has committed to the first leg of this in their mid-point of revenue guidance for the July quarter which is up $95M sequentially along with Non-GAAP gross margin expansion of 1.1% and Non-GAAP operating expense guidance of up only $6M.
Nvidia has a Forward P/E of 13.1 (Jan 29, 2014) and $3.13B in cash or $5.06/share and zero debt (Data from Capital IQ).
If inclined to buy this summer, I recommend exercising some caution and do not buy a full position all at once due to the annual summer market volatility.
Disclosure: I am long NVDA.
