- Despite softness in the PC market, Nvidia posted record
revenue in fiscal 2013 with a 7% annual increase. Its focus on
and success in mobile computing cushioned the negative impact
of lower PC shipments.
- Since it derives >80% of its revenue from the PC market,
Nvidia remains highly sensitive to
any adverse development in the PC industry.
- Nvidia is the market leader in GPUs and we believe its
revenue from the PC market will continue rising due to a
revival in the PC market, expanding gaming hardware market and
popularity of discrete GPUs.
- Discrete graphics remain
the preferred choice for gaming applications, and
Nvidia is the market leader in both the discrete desktop and
discrete notebook GPU markets.
- The PC gaming hardware market is estimated to increase from
$23.6 billion in 2012 to $30 billion by 2015. The robust
PC gaming market led to an increase in Nvidia's GPU shipments
in 2012 and its GPU market share increased by >10%.
- The professional GPU market will revive with improving
economic conditions and Nvidia will retain its
market leadership in the long run.
Despite macro headwinds and a sluggish PC market, fiscal 2013
was a record year for Nvidia (
). With $4.3 billion in sales, it marked 7% annual growth and
registered a marginal increase in gross margin. We believe that
Nvidia's focus on and success in mobile computing has cushioned the
negative impact of lower PC shipments on its growth rate. However,
deriving over 80% of its revenue from the PC market, the company
remains highly sensitive to any adverse development in
Nvidia's stock price has declined by more than 20% over the last
year, which we believe gives the company a valuation hard to
ignore. With the increasing revenue contribution from the non-PC
business segment and its dominance in the GPU market, we feel that
Nvidia has strong fundamentals to support a higher
valuation. Additionally, it has a solid balance sheet with a
strong cash position and no debt.
Our price estimate of $18.68 for Nvidia
is at a considerable premium to the current market price.
We believe that Nvidia's revenue from the PC market will
continue rising over our review period. In this article, we discuss
certain factors that reiterate our belief in the same.
See our complete analysis for Nvidia
1. PC Demand To Revive 2013 Onward
The slowing enterprise market, consumer softness in mature
markets (U.S. and Western Europe), slowing demand from emerging
markets, operating system transitions and cannibalization by
tablets are some of the main factors leading to the current slump
in PC shipments. However, while PC sales remained flat in
2012, research firm IDC estimates they will continue to increase
for years to come, albeit at a slower pace.
On account of the Chinese new year, new budget cuts by the
government and anti-corruption measures, PC demand in Q1 2013 was
lower than anticipated. However, IDC estimates a revival in demand
in the second half of the year. Improving macro conditions,
increasing demand from emerging economies and the
introduction of new convertible and hybrid designs will fuel PC
demand in the future.
|Total PC Sales
|Notebook & Netbook Sales
Source: IDC Press Release
Discrete Graphics Remain A Popular Choice For High-End
While many might argue that the significant improvement in
Intel's integrated graphic chipsets might threaten Nvidia's
dominance in discrete desktop and notebook graphics, we feel the
increasing popularity of high performance GPUs for high-end gaming
will enable Nvidia to retain its foothold in the GPU market.
Though integrated graphics turn out to be cheaper and provide an
enhanced battery life, discrete graphics remain
the preferred choice for gaming applications as the games
become more advanced. Better image quality and higher
performance are important criteria for gamers, and we expect
Nvidia's leadership in these qualities to help the company retain
its foothold in the growing gaming market.
In 2012, Nvidia transitioned Kepler architecture across its GPU
business. Kepler is the first architecture to include
virtualization technology built right into the GPU. Nvidia believes
that it is the most efficient GPU architecture to date, and
expects the same to translate into more market share and higher
margins. Nvidia's overall GPU market share increased from 53% in
2011 to 65% in 2012.
3. Increasing PC Gaming Hardware Demand
) is Nvidia's closest competitor in discrete graphics for PCs -
desktops and notebooks. Nvidia has historically been the leader in
both these markets and continues to account for a majority share,
despite increasing competition from AMD's GPUs.
Nvidia sells its PC graphic processors to original
equipment manufacturers (OEM) and PC gaming enthusiasts
who buy GPUs to generate realistic and interactive graphics
on PCs. While sales to OEMs have slowed down, the robust
PC gaming market led to an increase in Nvidia's GPU shipments in
2012. Jon Peddie Reasearch valued the PC gaming hardware
market at $23.6 billion in 2012, and forecasts the global gaming
market to cross $30 billion by 2015.
Massively multiplayer games and growth in cloud gaming continued
to drive the PC gaming market in 2012. As per market research firm
Newzoo, the global massively mutiplayer games revenues grew 21% in
2012 reaching $13 billion. Cloud gaming is a category of online
gaming which allows direct and on-demand streaming of games on a
computer. Nvidia has around six partners and is in the process
of evaluating new middleware partners who provide cloud gaming
to various telcos around the world.
Nvidia's GeForce is the gamers' choice of GPU by a margin of
almost 2:1. Earlier this year, Nvidia launched "Project
Shield", an Android based portable gaming console which can also be
connected to a PC. Project Shield will attract great games to Tegra
Zone, a free application available in the Android
market, which can then be played on any Tegra powered device.
Tegra Zone has already been downloaded 6 million times until
4. Nvidia Will Retain Its Market Leadership In
With over 27% contribution to Nvidia's valuation, the
professional graphics solutions segment is the most important
division in the company's portfolio. On account of weak demand for
its Quadro products, Nvidia's revenues from the professional GPU
market were relatively flat in fiscal 2013.
Nvidia believes that the softness in demand is on account
of enterprise weakness led by the weakness in the global
workstation market and the delay in the Romley platform, which
could have held back purchases. Nevertheless, amid soft macro
conditions, the company claims to have witnessed stable ASPs and
market share for its professional GPUs.
Accounting for 80% of the market, Nvidia remains the dominant
player in professional GPUs. While we estimate a slight decline in
its market share over the years, we expect the company to retain
its leadership in the segment for years to come. With the
upcoming Kepler Quadro products and new capabilities like
Maximus, which enables both modeling and simulation in one
workstation, we believe the company will see strong demand as the
workstation market recovers.
See our complete analysis for Nvidia's stock