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Nvidia Will See Quicker Growth Ahead On PC Market Recovery

By: Trefis
Posted: 4/2/2013 6:26:00 PM
Referenced Stocks: AMD;INTC;NVDA;QCOM;TXN

Quick Take

Despite macro headwinds and a sluggish PC market, fiscal 2013 was a record year for Nvidia ( NVDA ). 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 the industry.

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.

In Millions

2009

2010

2011

2012

2013

2014

2015

2016
Total PC Sales

304.9

347.1

363.9

367.2

391.1

418.6

450.1

483.1

Desktop Sales

136.2

145.9

154.8

153.0

155.7

158.8

160.9

162.0

Notebook & Netbook Sales

168.7

201.2

209.1

214.2

235.4

259.9

289.2

321.1

Source: IDC Press Release

2. Discrete Graphics Remain A Popular Choice For High-End Gaming

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

AMD ( AMD ) 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 now.

4. Nvidia Will Retain Its Market Leadership In Professional GPUs

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