Mobile Device, Automotive & Gaming Are Key Growth Drivers For Nvidia’s Tegra Processors

Leading Graphics Processing Units (GPU) manufacturer Nvidia (NASDAQ:NVDA) reported its Q1 2015 earnings on May 8. At $1.1 billion, revenues grew by 16% annually and earnings per share improved from 13 cents in Q1 2013 to 23 cents in Q1 2014, exceeding both the company guidance as well as consensus estimate. Growth in the quarter was driven by Nvidia’s strong performance in PC gaming, higher Tegra revenue and continued progress in the data center and cloud. (Read Our Earnings Article: Professional Graphics, PC Gaming & Tegra Drive Nvidia’s Growth In Q1’15)

The Tegra processors division marked its third consecutive quarter of growth (35% annual and 6% sequential), driven by increased volumes for mobile and auto infotainment systems. After growing at a robust rate in fiscal 2012 and 2013, Nvidia’s Tegra revenue declined 48% in fiscal 2014. The company saw its Tegra revenue base decline significantly in the first half of fiscal 2014 due to the ramp down of Tegra 3 products and the company’s conscious decision to delay the launch of Tegra 4 by one quarter, in order to pull up the production of Tegra 4i chips. However, Nvidia witnessed 110% and 18% sequential growth in Tegra revenues in Q3 2014 and Q4 2014, respectively, as it saw a rising number of Tegra-4 powered devices hit the market.

Nvidia derives 10% of its valuation from the Tegra division, as per our estimate. We believe that Tegra processors revenue will cross $1 billion over our review period. In this article we discuss the three key growth drivers for Nvidia’s Tegra business – mobile device, automotive and gaming.

Our price estimate of $18.43 for Nvidia is almost in line with the current price estimate.

See our complete analysis for Nvidia

Mobile Devices Is The Largest Segment

Leveraging its Tegra processors to tap growth in mobile computing is a key long term growth strategy for Nvidia. In order to better compete against Qualcomm (NASDAQ:QCOM), Nvidia pulled up the production of its Tegra 4i chips, its first fully integrated 4G LTE mobile processor, at the expense of its short term revenue growth last year. Nvidia currently has a negligible presence in the smartphone market. We believe that, although speeding up the launch of its LTE compatible chips impacted Nvidia’s short term growth, the move expands the company’s long term growth potential.

Nvidia scored its first significant design win for the Icera 500 modem with Microsoft’s (NASDAQ:MSFT) 4G enabled version of the Surface 2 tablet, in March 2014. Though the Surface tablets are yet to make a significant penetration into the tablet market, it is an important technical win for Nvidia. The addition of Surface 2 tablet further expands the list of devices powered by Nvidia’s modem technology, such as the Tegra NOTE 7 LTE tablet platform and smartphones with Tegra 4i, such as the LG G2 Mini and Wiko WAX.

Since the mobile device market is highly competitive, Nvidia is just narrowly focused on devices where it believes it makes a real contribution, devices where performance and differentiation matters. The company expects to see continuous growth in this segment for the rest of the year.

The Automotive Segment Is The Fastest Growing

Though the mobile device segment is the largest sub-segment in the Tegra division, the automotive segment is the fastest growing and offers higher gross margins (compared to devices). Nvidia’s auto business grew more than 60% annually in Q1 2015.

The automotive segment is a large market and is going through a transition to more computing capability. A rising number of cars and functionality within cars (infotainment system, digital cluster and automatic driver assistance) are being computerized. Nvidia claims that the number of visual computing-focused processors in a car is growing at a rapid pace. Specialty Analytics expects the market for Advanced Driver Assistance Systems to be worth around $15 billion by 2016, with a CAGR of 23%. ^[1]

Nvidia  has been working on building its automotive computing platform for over a decade and is in a strong position to leverage this growth. It claims that its automotive business has a $2 billion pipeline and it has already laid the foundation for the next generation of in-car electronics and advanced driver assistance.

Audi launched its Tegra-powered A3 in the U.S. last quarter and Nvidia claims that its processors are selling fast. The company is broadening its relationship with Audi, which plans to use the upcoming Tegra K1 chip in more of its cars.

Nvidia Eyes The Android Gaming Market

Nvidia launched Shield, its maiden attempt as a gaming hardware provider, in July last year. Shield (powered by Tegra 4) is an Android-based portable gaming console that also offers PC game streaming features. What differentiates Shield from other devices is that it is the only device to play Android games with an integrated gamepad. The company launched a new software upgrade for Shield last month.

The gaming hardware  market was worth $23.6 billion in 2012 and the global gaming market is estimated to cross $30 billion by 2015. ^[2] Nvidia aims to focus on developing the Android gaming market. Android is the world’s largest operating system platform, and the company believes that over time it will also be one of the world’s largest gaming platforms. Nvidia intends to leverage the capability and expertise it has developed in the PC industry in the last 15 to 20 years for the Android gaming market.

Tegra K1, the world’s first high performance 64-bit ARM-based  processor, will hit production before the end of this year. With the new processor, Nvidia hopes to score additional design wins in automotive, gaming and differentiated products.

1. Nvidia’s CEO Discusses F4Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 [↩]
2. PC Gaming Hardware Market to Hit $23.6 Billion in 2012, Jon Peddie Research, May 3, 2012 [↩]