Nvidia Has Huge Potential In The Mid-Range Smartphone Market

Earlier last month Nvidia (NASDAQ:NVDA) announced its intention to only focus on the mid-range smartphone market for now. Primarily known for designing and developing graphics processing units (GPUs), the company has considerably expanded its presence in the mobile computing domain with the rising popularity of its Tegra processors. Nvidia’s increasing exposure to the non-PC markets has cushioned the negative impact of declining PC sales on its growth rate.

However, while tablets remain the most important driver for its progress in the mobile computing space, Nvidia’s progress in smartphones remains more or less stable with only a few design wins to its credit. We feel the introduction of Tegra 4i, Nvidia’s first fully integrated 4G LTE mobile processor, will help expand its presence in the smartphone market.

Samsung and Apple together account for 50% of the smartphone market and mostly use their own in-house manufactured chips. ^[1] The two companies are the dominant players in the high-end smartphone domain, and thus Nvidia’s decision to stay away from this market makes sense. LG, Huawei, ZTE, and HTC are some of the key target players for Nvidia’s Tegra processors.

Nvidia’s focus on increasing its presence in the mid-range market, places it in direct competition with Qualcomm’s Snapdragon 400 chip. Qualcomm has been the leader in mobile chip market for many years while Nvidia is a relatively new player. While we believe that Qualcomm will remain tough competition for Nvidia, we think that with a more competitive portfolio the latter will be able to increase its presence in the fast-growing mobile chip market.

See our complete analysis for Nvidia

How Big Is The Mid-Range Smartphone Market?

With rising global demand, smartphones and tablets are slated to drive growth in the semiconductor industry going forward. Here are certain estimates that support the view:

– Smartphone shipments increased by 43% in 2012 ($675 million), accounting for nearly 40% of the mobile phone market. ^[2] Research firm IDC forecasts mobile phone shipments will climb to 2.2 billion units by 2016, and we estimate smartphones to account for 60% of the shipments. This translates into a CAGR of 13.3% between 2013-2016.

– IDC estimates the global tablet shipments to have reached 117 million units in 2012, a 65% increase from 2011, and forecast the market to rise to over 260 million units by 2016. ^[3] This implies that the tablet market will grow at a CAGR of 16.4% through 2016.

Assuming that the growth rate remains constant for all the years, we arrive at the following estimates.

Source: Gartner, IDC and Trefis Estimate

The mid-range mobile market is estimated to exceed the number of premium smartphones and tablets by 2015. The mid-range smartphones and tablets shipments combined is projected to more than double to 580 million units in 2015. ((ARM introduces the new Cortex-A12 core for upcoming mid-range smartphones, Talk Android, June 3, 2013)) If we assume that the percentage contribution of tablets and smartphones in total shipments is the same as that projected for 2015, we get an estimate of 487 million (=1180/1405*580) mid-range smartphones shipped in 2015.

Despite Increasing Competition From Qualcomm Nvidia’s Mobile Processor Shipments Will Rise

Qualcomm’s (NASDAQ:QCOM) LTE leadership has allowed the company to command leading smartphone market share so far. Last year it came out with its own quad-core chipsets, which reduces Nvidia’s advantage of offering the world’s first quad-core processor. While Nvidia expected to ship around 30 million Tegra processors in 2012, Qualcomm shipped 141 million chipsets in its fiscal Q4 2012 alone. ^[4]

By focusing on the mid-range smartphone market Nvidia pitches itself against Qualcomm’s Snapdragon S400 chip. Nvidia claims that its Tegra 4i delivers almost three times higher performance than Qualcomm’s S400 solutions. ((Nvidia’s CEO Discusses F1Q 2014 Results – Earnings Call Transcript, Seeking Alpha, May 9, 2013)) In addition to the comparatively better performance, we think that the launch of the LTE integrated chipset will increase Nvidia’s competitiveness in the smartphone market. Devices using the Tegra 4i chips are expected to start shipping early next year.

4G/LTE is the future of wireless connectivity for mobile devices, especially smartphones. Of the various technologies that are driving the market currently, LTE is seeing the strongest growth as carriers around the world increasingly shift to the new standard for wireless communication. Additionally, Nvidia’s Tegra processors are priced competitively. Tegra 3 processors cost anywhere between $15-$25 where as the Qualcomm mobile chipset averages around $21. ^[5]

The mobile device market and the LTE market are expanding at a rapid pace, and we believe that there is plenty of room for both Nvidia and Qualcomm to sell a higher number of processors in the future. In addition to Qualcomm, Nvidia competes with Broadcom (NASDAQ:BRCM), Marvell and MediaTek and the relatively new entrant Intel (NASDAQ:INTC).

Our price estimate of $17.75 for Nvidia is at a premium of over 20% to the current market price.

See our complete analysis for Nvidia’s stock

1. More Smartphones Were Shipped in Q1 2013 Than Feature Phones, An Industry First According to IDC, IDC Press Release, April 25, 2013 [↩]
2. Gartner Says Worldwide Mobile Phone Sales Declined 1.7 Percent in 2012, Gartner Newsroom, February 13, 2013 [↩]
3. IDC Raises Its Worldwide Tablet Forecast on Continued Strong Demand and Forthcoming New Product Launches, IDC Press Release, September 19, 2013 [↩]
4. Nvidia still has a lot to prove in the mobile market, CNET, November 9, 2012 [↩]
5. Nvidia Tegra 3 Costs Between $15-$25 (€11.3 to €18.9), Says Company, Softpedia, November 25, 2011 [↩]