Driven by strong demand for its quad-core Tegra 3
processors and the energy efficient Kepler
architecture, Nvidia (
NVDA
) posted record revenues of $1.2 billion and marked
a 7.3% y-o-y growth in its net income in Q3 2013. It is set to
announce its Q4 2013 earnings on February 13. While Nvidia
maintains a cautious outlook for Q4 on account of seasonal factors
and the persistent weakness in the PC market, we believe in
the company's long term growth potential.
With increasing revenue contribution from the non-PC business
segment and its leadership in the GPU market, we feel that Nvidia
has strong fundamentals to support a higher valuation. (Read:
Nvidia Is Worth $19 Despite Its Vulnerability To
The PC Market
)
See our complete analysis for Nvidia
Increasing Non PC
Revenues
While the slowdown in the PC market has impacted many of its
competitors such as Intel (
INTC
) and AMD (
AMD
), we think Nvidia's growing focus and success in the mobile
computing space has cushioned the negative impact of lower PC
shipments on the company's growth rate. Non-PC revenue accounted
for 30% of its overall revenue in Q3 2012, compared to 7%
three years ago.
Nvidia's Tegra business has increased 50% over last year. While
its tablet business has almost doubled, its progress in
smartphones remained more or less stable in 2012. Tegra 3
quad-core processors powered many of the world's popular devices in
2012 - Google's Nexus 7, Microsoft's Windows RT Surface
tablet, Lenovo's IdeaPad Yoga 11, Fujitsu's ARROWS X, World
first RT device by Asus, etc.
Last month Nvidia introduced its
much anticipated Tegra 4 processor, which not only offers
six times the GPU horsepower of Tegra 3, but unlike
its predecessor is also LTE compatible. With an
optional chipset, Tegra 4 offers worldwide 4G LTE voice and data
support. We believe that the LTE compatible chipset will
better equip Nvidia to challenge Qualcomm's (
QCOM
) growing dominance in smartphones, helping it increase its
penetration in the market. (Read:
Tegra 4 Could Spur Nvidia's Smartphone
Penetration
)
Apart from tablets and smartphones, Nvidia expects Tegra's use
in infotainment and navigation systems of cars will help drive
revenue growth from the automotive business as well.
Intro Of Kepler Architecture Will Help Retain GPU
Dominance
In mid-March last year, Nvidia launched its new Kepler GPU
architecture, which is the first architecture to include
virtualization technology built right into the GPU. The
company claims that Kepler is its most efficient GPU architecture
to date and expects the same to translate into more market share
and higher margins. Owing to new Kepler desktop products and Ivy
Bridge platform for notebooks, Nvidia's GPU business posted a 10.7%
sequential and 14.7% y-0-y increase in Q3 2013.
Nvidia claims to have increased its market share in the premium
segment with Kepler as part of the Ivy Bridge design cycle.
Additionally, in Q3, it introduced the world's first cloud-based
GPU built on the Kepler architecture. Starting with desktops and
notebooks, Nvidia intends to roll out Kepler into all of its
businesses.
Apple (
AAPL
) refreshed its desktop offerings with Nvidia's Kepler based
discrete graphics solution in October 2012. We believe that with
its high-end graphic performance, Nvidia will be able to retain its
foothold in its core business of GPUs for both, desktop and
notebook graphics.
Decline In The Quadro Business Is A Short Term
Trend
Nvidia's professional solution business registered a 4.2%
y-o-y decline, on account of weak demand for its Quadro products in
Q3 2013. Weakness in the global workstation market on account
of macro headwinds and the delay in the Romley platform, which
could have held back purchases, are the prime reasons which
contributed to lower revenues from the Quadro products.
Nvidia believes that the softness in demand is on account of
enterprise weakness and claims to have witnessed stable ASPs and
market share for its professional GPUs. 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 witness strong demand as
the workstation market recovers.
We will update our price estimate of $19.14 for Nvidia post
the Q4 2012 earnings release.
See our complete analysis for Nvidia's stock