Nvidia’s Performance In 2014: Factors That Are Driving Growth
Calendar year 2014 (fiscal 2015) has been a great year for GPU processors manufacturer, Nvidia (NASDAQ:NVDA). The company witnessed a marginal decline in its top line last year as strength in its high-end products (including its GeForce GPUs and Quadro, Tesla and Tegra processors) was partially offset by a decline in the desktop PC and notebook markets. However, Nvidia regained its growth momentum this year, and its revenue and net income have increased by approximately 15% and 50%, respectively, in the first nine months of 2014 compared to the same period last year. The company’s focus on addressing the top 30% of the market, mainly those vertical segments within a broader computing market where visual computing matters the most, is clearly paying off and has helped it outpace the PC market (where it has always had a significant exposure).
In this article, we briefly discuss the key developments in calendar year 2014 and primary factors that are driving Nvidia’s performance.
Our price estimate of $20 for Nvidia is slightly below the current market price.
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Rising Tegra Adoption Across Devices
Nvidia’s Tegra processors revenue increased by approximately 75% in the first nine months, compared to the same period last year. Growth in this segment is being driven by three key applications: mobile devices, automotive electronics and gaming.
Nvidia scored its first significant Tegra processor design win in March 2014 for the Icera 500 modem with Microsoft’s (NASDAQ:MSFT) 4G enabled version of the Surface 2 tablet. The addition of the Surface 2 tablet further expands the list of devices powered by Nvidia’s modem technology, including the Tegra NOTE 7 LTE tablet platform. It has wins as well in smartphones with the Tegra 4i, including the LG G2 Mini and Wiko WAX. In May 2014, Xiaomi, China’s biggest electronics company, introduced its first tablet (MiPad) based on Nvidia’s K1 mobile processor.
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). Automotive electronics is a large market and it is going through a transition as cars have increased computing capability in both the drive train and the dashboard. Increasingly, dashboard functionality within cars (infotainment system, digital cluster and automatic driver assistance) are being computerized. Nvidia has been working on building its automotive computing platform for over a decade and is in a strong position to take advantage of this growth. At present, there are more than 6 million cars using NVIDIA processors on the road, and the company expects another 25 million processors to be integrated into vehicles over the next 5 years. [1] Nvidia’s client list includes – Honda, Volkswagen, Audi, BMW, Lamborghini and Tesla Motors.
Nvidia is also focusing on developing the Android gaming market, which the company believes will become the world’s largest gaming platform over time. It 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. At present, there are over 400 games optimized for both touch and the controller on Tegra and more and more are leveraging the power of Tegra K1. [2]
Transition To Maxwell Drives Growth In High End PC Gaming
Nvidia completed the product transition to Maxwell based GPUs (desktop, notebook and workstation) in Q3 2015. Maxwell is Nvidia’s 10th generation GPU architecture, offering 2X the performance power of the Kepler architecture, which the company touted as the most energy-efficient GPU ever built by it.
PC gaming represents almost 40% of the worldwide gaming market, which is higher than consoles, phones, tablets or any other individual gaming segment. [3] GeForce sits at the center of the PC gaming ecosystem, powering close to 100 million gaming PCs around the world. Notebook gaming has grown at a CAGR of 51% in the last three years and Nvidia believes that the launch of new games this year will further drive growth for its GPUs. The industry is expanding both in terms of unit volume, as well as ASPs, as the production value of games continue to grow.
The Data-Center Business Witnessed Expansion In Multiple Ways In 2014
The release of the Kepler-based GPUs last year fueled Nvidia’s growth in professional graphics and translated into higher market share and margins for the company. Accounting for approximately 80% of the market, Nvidia remains the dominant player in professional GPUs. In its Q4 2014 earnings call, the company mentioned that it started its fiscal 2015 with a 64% share of the PC discrete graphics market, 81% of workstation graphics units and Tesla in pilot projects at 44% of all HPC sites. [4]
Nvidia launched the new Quadro product platform in August. The new line up provides up to two times the improvement in application performance and data handling capability. The Quadro professional solutions, including processors based on the new Maxwell GPU architecture, are seeing a fast ramp up in the market and are being shipped by all of Nvidia’s major OEM partners.
IBM unveiled its first open Power based system featuring Tesla GPU accelerators, which can significantly enhance Java, Big Data and technical computing applications. IBM announced plans to accelerate their enterprise applications using Tesla GPUs, including their nearly pervasive IBM DV2 with Blue database software. According to IDC, 32% of all HPC computing systems are IBM implementations. [5]
Nvidia’s GRID graphics virtualization continues to gain momentum, with around 1,000 enterprises worldwide evaluating the GPU server platform though the tri-grid online demonstration. The company launched a program with VMware for early customer access to GRID virtualized GPUs in August this year. The program is drawing wide global interest, and some of the early customers include: the aircraft maker Airbus, the international construction group CH2M Hill, healthcare provider MetroHealth, Villanova University and Halliburton.
Legal Tussle With Qualcomm
In September this year, Nvidia filed patent lawsuits against Qualcomm (NASDAQ:QCOM) and Samsung (OTC:SSNLF) alleging that they infringed on its patented GPU technology without proper compensation. Last month, Samsung hit back at Nvidia, accusing the company of infringing several of its semiconductor-related patents and for making false claims about its products. Samsung filed a lawsuit against Nvidia and a Virginia-based company, Velocity Micro (a small customer of Nvidia), in a U.S. federal court on November 4. In addition to seeking damages for deliberate infringement of several technical patents, Samsung has accused Nvidia for false advertising with the statement that “the Shield tablet is powered by the world’s fastest mobile processor, the Tegra K1″. Samsung alleges that its Exynos 5433 processor is faster on a couple benchmarks, and cited benchmarking studies performed by researchers at Primate Labs. [6]
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- Nvidia Powers New Honda Infotainment System, Nvidia Newsroom, October 1, 2014 [↩]
- Nvidia’s (NVDA) CEO Jen-Hsun Huang on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, August 7, 2014 [↩]
- Nvidia’s CEO Discusses F3Q 2014 Results – Earnings Call Transcript, Seeking Alpha, November 7, 2013 [↩]
- Nvidia’s CEO Discusses F4Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 [↩]
- Nvidia’s CEO Discusses F4Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 [↩]
- Samsung Just Cranked Up Its Legal Battle With Chipmaker Nvidia, Business Insider, November 11, 2014 [↩]