Nvidia (NVDA) is all the rage right now in mobile. Microsoft (MSFT) announced their very own tablet, called the Surface, for the fall Windows 8 RT launch, and it uses a Tegra 3 processor. Looks good, too, with a keyboard doubling as a screen cover. And it has the #1 best selling "app" of all time bundled with it ... Microsoft Office!
Then Google (GOOG) brings out the Nexus 7 Tablet with ASUS as the manufacturer and Tegra 3 as the processor. It has the new Android 4.1 Jelly Bean operating system too. Only $199 for the Google 7 inch tablet. Reviews compare it favorably with the Amazon (AMZN) Kindle Fire. Sure some people will throw up their noses at it because, well, you know, it's just not an Apple (AAPL) iPad. But then rumors have started about an Apple iPad-mini. What is this? Has Apple become a follower rather than a leader?
So how is Nvidia's profitability doing in the mobile business unit? Looking at the graph of the last 7 quarters of the revenue and operating income for the Consumer Product Business Unit, it's obvious that Nvidia has been spending a lot on their push into mobile.
Click to enlarge.
The Icera $367M purchase in the July quarter of 2011 also added to operating expenses. Plus, the transition from the dual core Tegra 2 to the quad core Tegra 3 hit revenue in the Jan. 2012 and April quarter of 2012 as OEMs waited for the newer Tegra 3 processor. Obviously, Nvidia is wanting to play with the big boys, and the Icera soft modem baseband technology puts them in a select group of semiconductor companies with the likes of Qualcomm (QCOM) and Broadcom (BRCM), that can make not only mobile application processors but baseband radios too. In fact, Nvidia has stated that early in 2013 the Icera soft modem will be integrated in the same die with the Tegra application processor like Qualcomm's Snapdragon MSM8960 does.
At the last earnings conference call, Nvidia's management covered the take up of Tegra 3 in smartphones along with future plans:
I'll now turn to our Tegra business. The world's first Tegra 3 phone was launched in February by HTC. The HTC One X is their new flagship product and has delighted reviewers worldwide. This is the first phone we've had that launched day one across multiple carriers. Tegra 3 gives it a long battery life, thanks to the 4-PLUS-1 quad-core architecture, console gaming -- console quality gaming and fast web browsing. And because Tegra 3 utilizes a specially enhanced 40-nanometer process, it's not affected by 28-nanometer supply constraints.
Other phone wins around -- announced at Mobile World Congress includes ZTE with the first Tegra plus Icera phones, Fujitsu, LG and K-Touch. Tegra 3 phones are now shipping from 22 carriers in Europe and Asia and more will follow shortly.The launch this past quarter of the first 2 phones with Icera baseband processor signals a new opportunity for NVIDIA to penetrate the mainstream smartphone market and to capture a greater share of the silicon bond in each phone. Looking forward, you'll see Tegra 3 LTE phones with partners' baseband processors in the second half of this year and then next year with our own LTE baseband processors as well.
Based on the steady revenue and earnings stream of Nvidia's Consumer GPU business unit...
and the immensely profitable Professional Business Unit, which serves the workstation pro graphics and high-performance computing market...
Nvidia has the staying power to spend what it takes to become a major player in the mobile chip market. For more details on the Consumer GPU and Professional Services Business Units, see my previous Seeking Alpha article, "2012 Could Very Well Be Nvidia's Breakout Year."
Based on Friday's closing stock price of $13.40, Nvidia has a Forward PE (Jan 29, 2014) of 14.26 and Cash of $3.13B or $5.06/share and only $20.8M in debt (Data from Capital IQ).
Nvidia's push into mobile is not a passing fad, and they will spend what it takes to make it happen. It will not be an immediate win, but with Nvidia's cash on the books, engineering expertise, and cash flow from their other businesses, it should happen over the next 6 to 9 months. The July quarter revenue guide of up 10.3% sequentially is a positive indicator of the beginning of the turn.
If inclined to buy this summer, I recommend exercising some caution, and would not advise buying a full position all at once due to the annual summer market volatility.
Data from company's earnings releases, 10Qs and 10Ks.