Nvidia Can Hit $20 if Tegra Takes Off

Nvidia (NASDA:NVDA) reported its Q2 fiscal 2012 earnings last week and while overall consumer graphics revenues continues to pick up at a brisk pace which led to a jump in shares, the same cannot be said for its Tegra processors. Tegra processors are aimed at the smartphone and tablet market which is currently dominated by Apple’s (NASDAQ:AAPL) processors and other players like Qualcomm (NASDAQ:QCOM) and Texas Instruments (NYSE:TXN). Tegra is a part of what we call as mobile & game console computing chips business for Nvidia. We estimate that this business constitutes just under 15% to its stock and therefore success of Tegra does hold some importance for Nvidia overall.

Our price estimate for Nvidia stands at $20 implying a premium of about 50% to the market price

Tegra Needs to Take Off to Carry Momentum

Tegra 2 was one of the most anticipated product launches from Nvidia in the beginning of 2011. Although it has gained some traction among handset makers, the Q2 results suggest that the adoption has not been as much as was expected.

The smartphone market is still dominated by established players like Qualcomm while in tablets Apple reigns supreme. Perhaps, the issue with Tegra 2 is not so much concerning its performance, but rather, it has to fight to establish itself in a crowded market. We believe that Tegra will be able to do this but over a longer period of time.

If Tegra is unable to pick up growth in the coming quarters, Nvidia could be in trouble as that could potentially give other players a chance to catch up to Nvidia’s technology and narrow Nvidia’s performance advantage.

Also, the company cannot solely rely on growth in embedded products and game console royalties, which were primary driver of growth in consumer product revenues in Q2. The mobile market is big and tablets have a bright future and so this is one area where Nvidia needs to get some growth.

See our complete analysis for Nvidia’s stock.