Nvidia Will Show Accelerated Growth In The Second Half Of 2013
Quick Take
- Seasonal factors, declining PC shipments and lower Tegra sales led to a 13.7% sequential decline in Nvidia’s Q1 2014 earnings. Since it continues to derive over 50% of its revenue from PCs, we do not anticipate any significant growth in top-line in Q2 2014.
- However, with rising revenue from the non-PC business segment and its dominance in the GPU market, we believe in Nvidia’s long-term growth potential.
- As PC shipments continue to decline, the robust PC gaming market will drive growth in Nvidia’s GPU shipments. The PC gaming hardware market is estimated to grow from $23.6 billion in 2012 to $30 billion by 2015. Nvidia also started shipping its own handheld device, Project Shield, late last month.
- Despite the success of Tegra 2 and Tegra 3 processors, Nvidia has been unable to score a high profile design win that can accelerate its progress in the mobile computing domain.
- However, with Tegra 4 devices and Tegra 4i certification underway (expected in Q3) Tegra shipments will accelerate in the second half of the year.
- Additionally, with the extension of Kepler architecture to new markets, Nvidia is moving towards a higher market share among gamers, strengthening workstation and supercomputing segments and extending its lead in GPUs to servers and data centers.
Seasonal factors, declining PC shipments and lower Tegra sales led to a 13.7% sequential decline in Nvidia’s (NASDAQ:NVDA) Q1 2014 earnings. The company will announce its Q2 2014 results on August 8 and does not anticipate any significant growth in its top-line. Despite efforts to expand its operation in alternate growth markets such as tablets, smartphones and gaming, Nvidia still derives a majority of its revenues from the PC market, which continued to decline in Q2 2013 (calender year).
To reduce its dependence on PC shipments, Nvidia aims to extent its GPUs beyond PCs and leverage Tegra processors to tap the fast growing market for new computing devices. The company is gaining market share among gamers, strengthening its workstation in super computing segments and extending its lead in GPUs to servers and data centers.
With the extension of its Kepler architecture, its most efficient GPU architecture to date, in new markets, Nvidia expects to accelerate future demand for its products. The company witnessed strong sales of its high-end GPUs for PC gaming and increasing acceptance of the Kepler architecture in PCs and beyond in Q1 2014. It claims that the introduction of Kepler has translated into higher market share and margins for the company.
With the rising revenue contribution from the non-PC business segment and its dominance in the GPU market, we believe in Nvidia’s long-term growth potential.
See our complete analysis for Nvidia
PC Shipments Continue Declining
The cannibalization by tablets and smartphones combined with a weak reception for Windows 8 OS, the slowing enterprise market, consumer softness in mature markets (U.S. and Western Europe), and slowing demand from emerging markets are the main factors leading to the slump in the PC market. PC sales declined marginally in 2012, and research firm IDC estimates the downward trend to continue this year as well.
Global PC shipments witnessed the sharpest quarterly decline (13.9% y-o-y) in Q1 2013 in almost two decades. IDC predicts worldwide PC shipments to have declined by 11.7% in Q2 2013, but forecasts PC demand to improve in the second half of 2013 with the rate of decline slowing to 4.7% in Q3 2013 and 1.6% in Q4 2012. [1] We maintain a conservative estimate for PC shipments in the future.
Deriving more than 50% of its revenues from the PC market, Nvidia’s performance continues to be dependent on the state of the industry. It marked a 5.6% sequential decline in its Q1 2014 GPU sales on account of weak PC shipments.
Expanding PC Gaming Market To Drive Nvidia’s GPU Sales
Nvidia sells its PC graphics to two key segments – PC Original Equipment Manufacturers (OEMs) and gaming enthusiasts – to generate realistic and interactive graphics on PCs. While PC shipments have slowed, the robust PC gaming market contributed to higher GPU shipments in 2012 and the positive trend continued in Q1 2014.
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. [2] On the other hand, the PC gaming software market is expected to increase from $17 billion in 2012 to over $20 billion by 2015. [3] Nvidia’s GeForce is the gamers’ choice of GPUs by a margin of almost 2:1. [4]
Nvidia introduced its highest performance single GPU – GeForce GTX Titan – earlier this year. Available for $1,000, the company claims the GPU is selling at a fast pace. Backed by growing strength in consumer gaming, Nvidia expects to see continued growth momentum in its consumer gaming division this quarter as well.
Nvidia started shipping its own handheld device, Project Shield, late last month. Project Shield 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. Powered by the Tegra 4 processor, Shield is Nvidia’s maiden attempt as a gaming hardware provider, pitching it against console makers like Sony and Microsoft.
Despite Short-Term Slowdown Tegra Remains A Long-Term Growth Driver
Leveraging its Tegra processors to tap growth in mobile computing is a key long-term growth strategy for Nvidia. Though Tegra revenues increased by nearly 30% in fiscal 2013, the division witnessed a 50.5% sequential and a 22.2% annual decline in Q1 2013. The company expects a flat year for its Tegra business as it made a conscious decision to delay the launch of Tegra 4 by one quarter in order to pull up the production of Tegra 4i chips by two quarters.
Tegra 4 is the world’s first quad-core processor based on Cortex A15, whereas Tegra 4i is Nvidia’s first fully integrated 4G LTE mobile processor. While Tegra 4i is targeted at smartphones, Tegra 4 is meant for tablets, set-top boxes, automotive market, etc. In anticipation of Tegra 4, Nvidia’s customers cut down the production of Tegra 3 based mobile devices in Q1 2014. The trend is likely to continue this quarter as well.
Despite the success of its Tegra 2 and Tegra 3 processors, the company has been unable to score a high profile design win that can accelerate its progress in the mobile computing domain. However, with Tegra 4 devices and Tegra 4i certification underway (expected in Q3), we expect growth in Tegra shipments to accelerate in the second half of 2013.
Nvidia recently announced its next generation Tegra mobile processor, code-named Logan, based on the Kepler architecture. The company promises that the new mobile graphics processor will be mere powerful than the PS3. Mobile devices using Nvidi’a new chip are expected to start shipping by mid-2014. [5] We expect Tegra to be an important revenue stream for Nvidia in the future.
We will update our price estimate of $17.75 for Nvidia after the Q2 2014 earnings release.
See our complete analysis for Nvidia’s stock
Notes:- May PC Shipments Reflect Slow Second Quarter, According to IDC, IDC Press Release, June 28, 2013 [↩]
- PC Shipments Post The Steepest Decline Ever in a Single Quarter, According to IDC, IDC Press Release, April 10, 2013 [↩]
- Nvidia’s CEO Discusses F1Q 2014 Results – Earnings Call Transcript, Seeking Alpha, May 9, 2013 [↩]
- Nvidia Corporation’s CEO Discusses F4Q13 Results – Earnings Call Transcript, Seeking Alpha, February 13, 2013 [↩]
- Mobiles to advance to console-beating visuals with new ‘Project Logan’ tech, says Nvidia, CVG, July 24, 2013 [↩]