Factors That Can Increase Nvidia’s Valuation By More Than 25%
Graphics processor manufacturer Nvidia (NASDAQ:NVDA) continues to focus on addressing the top 30% of the market, mainly those vertical segments where visual computing matters the most. The strategy is clearly paying off and has helped it outpace the PC market, where it has always had a significant exposure. The company closed its fiscal 2015 (ended Jan’15) on a strong note, with a 13% and 43% increase in revenue and net income, respectively, as it seems to be making excellent progress on its strategy of creating an ecosystem in gaming, enterprise graphics, accelerated computing and automotive.
Our price estimate of $23 for Nvidia is slightly above the current market price. In this article we list down certain factors that together can lead to an approximate 25% increase in our valuation for the company.
See our complete analysis for Nvidia
Faster Than Expected Growth In Automotive & Shield Tegra Processors (~15% Upside)
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 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. The company retained its growth momentum in fiscal 2015, with the Tegra revenue base expanding by 45% during the year.
While mobile computing has been a key focus area and the largest segment for Nvidia’s Tegra business in the last few years, the company claims that automotive and SHIELD (Nvidia’s gaming device) now represent the vast majority of its Tegra revenue. Nvidia expects the two segments to be the biggest growth drivers for its Tegra division in fiscal 2016. We forecast Tegra processors revenue to cross $1 billion by the end of our review period.
The automotive segment is the fastest growing sub-segment and offers higher gross margins (compared to devices). Automotive electronics is a large market and 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.
Strategy Analytics expects the market for Advanced Driver Assistance Systems to be sized at 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. The company’s automotive platforms remain on a sharp upward trajectory with over 7.5 million cars using Nvidia’s technology at present, up from 4.7 million a year ago.
In the last few quarters, Nvidia has significantly expanded its Shield lineup, which includes the Shield Android handheld console, the Shield tablet, and an Android TV console. Nvidia claims that the mobile gaming market is a $70 billion market and is growing rapidly internationally. The mobile cloud is probably one of the most important disruptions in the history of computing, and yet there’s really no computer gaming architecture that serves mobile cloud very well. According to Nvidia, SHIELD offers the platform that allows the mobile cloud to bring gaming to an underserved and new market. Given its strong graphics and processing capabilities, the company is able to deliver a compact powerful and optimized system to eager gamers.
Given the above factors, it is possible that we are currently underestimating the growth potential for Tegra processors. If Nvidia is able to increase its Tegra revenue base to over $2 billion and manages to improve EBITDA margins to 30% (higher revenue contribution from automotive could significantly improve margins), our valuation for the company will increase by approximately 15%.
Continuous Increase In Nvidia’s Discrete Graphics Market Share (>10% Upside)
For years, Nvidia and AMD (NYSE:AMD) have been battling in the discrete GPU market. The market share of the two companies have fluctuated a lot between quarters, but Nvidia still manages to retain its lead over Intel in the discrete GPU market. As of Q3 2014, Nvidia accounted for more than 70% of the discrete GPU market in terms of unit shipments. Nvidia has always focused exclusively on graphics. By acquiring ATI, Nvidia’s key rival in graphics, for $5.4 billion in 2006, AMD managed to get a big slice of the discrete GPU market.
In our model, we forecast Nvidia’s discrete notebook and desktop GPU market share to remain around the current level for the rest of our review period. We think that with the intense competition with AMD, Nvidia might not able to sustain any significant increase in its market share in the long run. However, in the last few quarters Nvidia has managed to extend its lead in the GPU market over AMD.
Nvidia announced new technology and an updated GPU roadmap at its GPU Technology Conference in May’15. According to AnandTech, the GPU competitive landscape right now will greatly favor Nvidia. With AMD’s high-end GPUs having last been refreshed in 2013 and with the GM204 GTX 980 already ahead of the Radeon 290X, GTX Titan X further builds on Nvidia’s lead in the GPU market. [2] Additionally, Nvidia spends significantly more on R&D compared to AMD. In 2014, Nvidia’s R&D expenditure was approximately 27% higher than that of AMD. Keeping in mind the higher level of investment, for a narrower range of products compared to AMD, Nvidia could manage to further extend its lead in the discrete GPU market. If Nvidia’s market share in the discrete GPU market reaches 90% (in both notebooks and desktops), our valuation for the company will increase by over 10%.
In the professional graphics segment, though Nvidia still commands the lion’s share of the market (with a 75% market share, AMD managed to gain few points of the market share in 2014. Last year, Apple (NASDAQ:AAPL) adopted AMD’s FirePro graphics card (replacing Nvidia GPUs) for its MacBook. Given AMD’s limited presence, it will look to enhance its offerings and compete on price with Nvidia. AMD cut the price of some of its professional GPUs by 50% in December last year to better compete in the market. Thus, we currently estimate Nvidia’s market share in professional graphics to decline marginally over our review period. However, if the company manages to gain back some of its lost market from AMD, there will a marginal upside (<5%) in our valuation for the company.
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Notes:- Nvidia’s CEO Discusses F4 Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 [↩]
- The Nvidia GeForce GTX Titan X Review, AnandTech, March 17, 2015 [↩]