Nvidia (NASDAQ:NVDA) announced its Q2 2013 earnings on Thursday, August 9. As we had expected, strong Tegra 3 sales were one of the primary reasons for the 13% sequential increase in revenues. Amid persisting macroeconomic headwinds, Nvidia expects to continue the growth momentum in the next quarter driven by the Kepler architecture and Tegra 3 processors. (Read: Nvidia Posts Solid Earnings Backed By Tegra 3 & Kepler Architecture)

We continue to believe that Nvidia’s focused growth strategy in the tablet market will help it register substantial growth in Tegra revenues. We estimate Tegra to become the most important division for Nvidia by the end of our forecast period. While the increasing number of product wins point at Nvidia’s strengthening position in the tablet space, we believe that Qualcomm (NASDAQ:QCOM) poses a serious threat and could act as a negating factor for the company’s growth.

See Our Complete Analysis for Nvidia Here

Nvidia’s Focused Push in Mobile Computing

Last year, Nvidia began a focused push into mobile computing with ambitions of being more than a graphics chip maker. It positioned its standalone dual-core app processor, Tegra 2, well to capture significant non-iPad tablet market share in 2011. With the success of its quad-core Tegra 3 processor, it plans to make a deeper foray by targeting low-end tablets and cashing in on the huge untapped opportunity that the nascent tablet market offers.

Mobile devices are the fastest growing segment of the computer industry. According to research firm Gartner, tablet sales to end-users will register a 98% increase, totaling close to 120 million units this year and, with the growing popularity of tablets, sales could cross 350 million units by 2016. ^[1]

The launch of Tegra 3 accelerated Nvidia’s growth in the mobile computing segment, which is evident from 36% sequential increase in the consumer products business. Hitting record sales in Q2 2013, Tegra 3 processors featured in a number of exciting devices this year – Google’s Nexus 7, the world’s first $199 quad-core 7-inch tablet, Microsoft’s Windows RT Surface tablet, Fujitsu’s ARROWS X, the world’s first quad-core LTE smartphone, and the World first RT device by Asus.

Additionally, by leveraging its recent acquisition of Icera, Nvidia is working toward LTE integration. In order to grow further in the smartphone and tablet market, the company thinks the integration of the LTE modem will substantially grow its market opportunity in the future.

Potential Threats from Qualcomm Processors

Though the mobile semiconductor market is currently dominated by Qualcomm, Nvidia has been focusing on tablets to challenge the former’s growing smartphone dominance. With the launch of Tegra 3 processors, the world’s first quad-core processors, Nvidia intends to make significant inroads in the tablet market. Though the company has made significant process in the last one year with design wins at Microsoft, Acer, Asus, Samsung, Sony, LG, Motorola and Toshiba among others, Qualcomm remains a huge threat to Nvidia’s foray in the mobile computing segment.

Qualcomm has been working closely with Microsoft and preparing its Snapdragon processors for the Windows 8 tablet to be launched later this year. It also recently showcased its chipset with a quad-core Krait CPU, which might negate Nvidia’s competitive advantage in the coming quarters. Additionally, with LTE featuring in most tablet manufacturers’ plans in 2012 and beyond, Qualcomm will be looking to leverage its dominance in the LTE market to win deals for its integrated Snapdragon application processors. (Read article: Qualcomm Leads the LTE Charge In 2012)

Our price estimate of $21.87 for Nvidia is at a premium of close to 50% to the current market price.

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1. Gartner Says Worldwide Media Tablet Sales to Reach 119 Million Units in 2012, Gartner Newsroom, April 10, 2012 [↩]