Higher Prices and Margins to Increase Nvidia’s Profitability

Includes: AMD, NVDA
by: Trefis

Nvidia (NASDAQ:NVDA), which competes with AMD (NASDAQ:AMD) in the graphic cards business, indicates that its profit margins are benefiting from the launch of its latest line of graphics processors. If this trend were to continue, there could be additional upside to the $13 Trefis price estimate for Nvidia’s stock.

Below we highlight how demand for Fermi-based desktop graphics processors and high priced, high margin professional graphics cards can continue to drive profitability for Nvidia.

Demand for Higher Priced Fermi Processors Lifts Nvidia’s Profit Margins

Fermi is the codename for Nvidia’s latest computing architecture which is considered to be one of the best by industry experts. Fermi graphics cards such as the GeForce GTX 470/480 have demonstrated graphics processing performance that is 2.5-3x faster than previous generations of graphics cards, resulting in more life-like graphics for desktop PCs.

Nvidia reported that a strong sales mix of Fermi-based graphics processors resulted in higher average selling prices for the company’s discrete desktop graphics cards business. Higher average selling prices also have a positive impact on the profit margins for Nvidia’s desktop graphics business.

As a result, we have updated our previous estimate of a 2% decline in average selling prices for discrete desktop graphic cards to a 1% increment for 2010 although we continue to forecast decline for the rest of our forecast period.

Rising Demand for High Priced and Highly Profitable Professional Graphics Cards

Nvidia launched its new series of professional graphics cards (Quadro and Tesla) during the past quarter. Strong demand for such graphics cards led to a 20% revenue increment for Nvidia’s professional graphics business compared to the previous quarter.

Professional graphics cards are used primarily by business professionals that need powerful graphics for the purposes of demonstrating designs and complex simulations.

Quadro, which is targeted at professional designers and modelers, is benefiting from the on-going business IT upgrade cycle. With capabilities enhanced at both software and hardware levels, Quadro is gaining traction in new growth markets such as video editing.

Professional graphics are high profit margin products that typically having 2x -3x the profit margins of desktop graphics cards. Due to higher profitability, the professional graphics business constitutes about 30% of the $13 Trefis price estimate for Nvidia’s stock. In comparison, discrete graphics cards (found primarily in desktops) account for on about 20% of our estimate for Nvidia’s stock.

You can modify our forecast for professional graphics margins below to see how significant the impact on Nvidia’s stock could be if margins were to rise further than we forecast.

Disclosure: No positions