Nvidia (NVDA) shares have struggled mightily over the past two months, dropping nearly 20% over that period of time. This weakness has come in the face of the fairly bullish forecast that Nvidia issued along with its Q2 earnings in August. However, Nvidia got some good news on Tuesday, when Apple (AAPL) held its long awaited product announcement event in San Jose. Nvidia received a new design win for its Kepler line of GPUs, and learned that Tegra-powered tablets will maintain some breathing room on price, as Apple's new iPad mini will carry a higher-than-expected $329 starting price.
Another Design Win: While the iPad mini introduction grabbed most of the attention on Tuesday, Apple also announced a refresh of its iMac line of all-in-ones (along with some other product refreshes). The new iMac will come with Nvidia's new Kepler line of GPUs as standard equipment. This is a very important design win, as the previous generation iMac used graphics chips from Nvidia's main competitor, AMD (AMD). Furthermore, Apple has been selling 4-5 million iMacs on an annual basis. This means that the revenue opportunity from this single design win could reach hundreds of millions of dollars over the next year or two (depending on when the next refresh is launched). Nvidia will begin to see this revenue in Q4, and this incremental revenue may allow Nvidia to post another quarter of sequential revenue growth despite broad industry weakness. Currently, analysts' Q4 projections are mixed, ranging from $1.01 billion to $1.26 billion. By contrast, Nvidia expects revenue between $1.15 billion and $1.25 billion in Q3.
Nvidia receives some additional benefits from the iMac announcement. First the company got some free publicity, which can be very valuable when delivered by Apple. The Apple press release states, "The latest NVIDIA GeForce processors deliver up to 60 percent faster performance for advanced gaming and graphics intensive apps." More importantly, Apple's drive to increase pixel density increases the importance of having a discrete graphics card. As Ashraf Eassa wrote on Tuesday, other major PC vendors like HP (HPQ) and Dell (DELL) are likely to follow Apple's lead in order to maintain share in the profitable high-end market.
The iPad mini won't kill the Nexus 7: The other positive for Nvidia in Apple's announcement was that the widely expected iPad mini will have a starting price of $329. This was higher than most analysts expected; most were predicting $249 and $299 price points. This should give some breathing room to tablets using Nvidia's Tegra 3 SoC, such as the Google (GOOG) Nexus 7. The entry-level Nexus 7 is priced at $199, and the 16GB model (comparable to the iPad mini) costs $249. While many customers will no doubt opt for the iPad mini, the Nexus 7 (as well as Amazon's (AMZN) Kindle Fire and Kindle Fire HD) will still appeal to price-conscious consumers. By contrast, an iPad product starting at $249 would have taken more share from Google, Amazon and other low-cost tablet vendors.
One Disappointment: While the iMac and iPad mini announcements were both positive for Nvidia, I was disappointed to see that the new 13" MacBook Pro with Retina Display does not have Nvidia graphics. Instead, Apple opted to go with Intel's integrated graphics, in order to save money. I was somewhat surprised because a "retina" type display would perform noticeably better on graphics-heavy workloads with a discrete graphics card. Perhaps Apple is trying to differentiate the 13" model from the 15" model that is already on the market. In any case, with a starting price $500 lower than the 15" MacBook Pro with Retina Display, the 13" model will likely cannibalize some of the latter's sales. The 15" retina model does have Nvidia graphics, so Nvidia may lose some revenue as a result. However, most consumers willing to spend $1699 or more for a laptop are probably willing to go all out and pay a premium for the higher-spec 15" laptop.
Conclusion: On the whole, I think the Apple announcement is a positive catalyst for Nvidia. Given the iPad mini's pricing, it will only pose a moderate threat to Nvidia's competitive position in mobile. Moreover, I think the iMac design win will far outweigh any loss of revenue from cannibalization of the 15" Macbook with retina by the new 13" model. While Nvidia shares rose on Tuesday, at Wednesday's close they were trading at $12.17, within 5% of 52-week lows. At this price, I am looking to add Nvidia shares prior to the company's November earnings release. By contrast, I view the iMac announcement as yet another nail in AMD's coffin. There is a very real possibility that AMD's share loss to Intel and Nvidia will send the company into a death spiral, as it cannot afford to invest in innovation going forward.
Additional disclosure: I am also short AMZN.