Nvidia’s Downside Limited if Desktop PC Sales Drop

December 2nd, 2010 by Trefis Team
-34.60%
Downside
142
Market
92.84
Trefis
NVDA: NVIDIA logo
NVDA
NVIDIA

Nvidia (NASDAQ:NVDA) designs and develops graphics processing units (GPUs), which are high performance processors that generate realistic and interactive graphics on computers. The company competes with AMD (NYSE:AMD) in discrete and integrated GPU business as well as with Intel (NASDAQ:INTC) in the integrated GPU business.

At first glance, Nvidia seems highly dependent on desktops. We estimate that desktop related business like professional GPUs (currently primarily used in desktops), discrete desktop GPUs and integrated desktop GPUs together constitute more than half of Nvidia’s value. More specifically, professional GPUs account for 38% while discrete and integrated desktop GPUs account for 18% and 9% of Nvidia’s stock respectively.

Desktop market growth is stalling, and potentially declining, generating concerns on Nvidia’s intrinsic value. Although Nvidia seems highly exposed to this market, we believe that a potential drop in desktop sales would have a minimal impact of around 4% to our price estimate of $13.43.


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Little Impact From Desktop to Notebook Shift

Although Nvidia’s professional GPU products like Quadro and Tesla are primarily used in desktops, a declining desktop market will not affect this business.

Professional graphics card growth will be aided by increased adoption of computer-aided design technology in various industries and easier-to-use 3D graphics software and applications. The need for these applications is independent of a shift from desktop to notebooks. If there is a decline in desktop workstations, they will simply be replaced by mobile workstations and overall professional GPU market growth will be unaffected.

Unlike consumer PCs where AMD dominates in the notebook segment, Nvidia dominates in professional graphics segment both in desktops and notebooks. Thus, a shift of workstations from desktop to mobile will not materially impact Nvidia’s share of professional GPU market.

Discrete and Integrated Desktop GPU Businesses Affected

Nvidia’s discrete desktop GPU and integrated desktop GPU businesses will be directly impacted by a potential decline of desktop sales in future. We currently forecast desktop units to stay more or less flat.

However if desktop sales were to decline from an estimated 140 million in 2010 to 120 million by the end of our forecast period, this could potentially lead to about 4% downside to Nvidia’s stock.

The above mentioned downside is a combination of declines in unit sales, a faster decline in pricing and consequently affected margins for both discrete and integrated desktop GPU businesses. As desktop sales decline, there will be pressure on pricing due to reduced demand and margins will shrink.

While a slowdown in desktop sales does not bode well for Nvidia, the downside appears limited.

You can see the complete $13.43 Trefis price estimate for Nvidia’s stock here.