Nvidia Corporation (NVDA) shares have seen a slight rebound over the past month from levels approaching $12 to nearly $14 as of July 3. However, this still places the stock far below the levels of 1HCY11. As I have noted previously, Nvidia represents a great value in part because of its massive cash position (at roughly $5/share, it accounts for more than 35% of the stock price). This cash position allows Nvidia to invest in future growth and buffers it against any worsening of macroeconomic conditions.
Building on this fundamental strength, Nvidia shares will be propelled in the coming months by several positive catalysts. Whereas last year, Nvidia was hit hard by the hard disk drive shortage caused by flooding in Thailand, Nvidia will see strength this fall on the back of several key new product introductions.
1) MacBook Pro: Apple (AAPL) confirmed last month that it was switching back to Nvidia from Advanced Micro Devices, Inc. (AMD) for discrete graphics cards in the new 15-inch MacBook Pro models. The heavy appeal of the retina screen option, in particular (Apple has been estimating a 3-4 week wait for the MacBook with retina display almost since the model's introduction) will drive incremental revenue growth.
The Mac line continues to gain share in the notebook market, and the recent product refresh will probably increase this trend. Nvidia's Kepler line of graphics cards are the undisputed market leader for rendering graphics. Given the apparent popularity of "retina" displays, which require substantial graphics processing power, Kepler's excellent graphics performance bodes well for Nvidia vis-a-vis AMD discrete GPUs (and integrated GPUs).
2) Ivy Bridge design wins: Nvidia has stated that it has significantly more design wins for use with Ivy Bridge processors than for last year's Sandy Bridge architecture. While analysts are divided about whether the fall launch of Microsoft's (MSFT) Windows 8 will spark a PC refresh cycle, it seems certain that there will be significant year over year growth in the PC market this fall, simply due to easy comps from last year. The combination of higher PC sales and a higher share of those sales should allow Nvidia to comfortably beat analyst estimates for FY13 (Jan.) of only 71 cents.
3) Tablet takeoff: Nvidia's rally in early-2011 was in large part driven by anticipation of gains resulting from the dominance of Nvidia's Tegra SOC (system on a chip) in the non-Apple tablet market. However, no Android tablet has thus far been able to rival the iPad. Furthermore, the best selling non-Apple tablet so far, Amazon's (AMZN) Kindle Fire, uses Texas Instruments Inc.'s (TXN) OMAP chip. However, this may be changing.
Most importantly, Google (GOOG) last week announced a $199 tablet: the Google Nexus 7. The Nexus 7 has received numerous positive reviews. It is clearly superior to the Kindle Fire and sells at the same price point. Furthermore, it is much cheaper than any iPad model on the market today. While not an iPad killer, it is likely to be the second best-selling tablet out there due to its strong value proposition, and will help propel Nvidia past its $540 million target for FY13 Tegra sales.
In addition to the Android tablet market, Nvidia is also poised to take a large share of the new Windows RT tablet market. Microsoft, too, announced its own tablet last month, the Surface. While the Surface will be priced comparably to the iPad, it will have a keyboard included and support Microsoft Office productivity apps. This may enable it to gain a significant foothold in the enterprise market.
4) Low-cost smartphones: Another major market opportunity for Tegra is the low-medium price section of the smartphone market. As the company noted at its investor meeting in May, while none of Tegra's 15 design wins in 2011 were for phones retailing under $300, in 2012 13 of Tegra's design wins are for sub-$300 phones. Furthermore, 18 of Tegra's design wins are for China OEMs. This bodes well for phone shipment numbers this year.
China is a very large and quickly growing smartphone market, and with design wins in lower cost phones, Nvidia can begin to penetrate the mass market there. This initial beachhead provides a jumping off point for further gains over the next year as Nvidia releases a 28 nm version of Tegra 3 (which will improve power consumption and performance) and integrates Tegra SOCs with the company's Icera line of modems. This integrated chip (code-named "Grey") will likely become the first bona-fide competitor for Qualcomm's (QCOM) Snapdragon line.
In summary, Nvidia has many things going for it over the next six months. The company has significant growth prospects in its Tegra business, and the stock currently trades for only 13X current analyst estimates (excluding net cash of $5/share). I expect NVDA shares to retest resistance around $16 and quite possibly break out towards $20 if the company beats the market's expectations as I expect.
