3 Trends that Can Lift Nvidia’s Stock

Nvidia’s (NASDAQ:NVDA) stock rose 11% over the past week. The main trigger appeared to be a rating upgrade from Wells Fargo based on expectations of an improving PC chip market. ^[1] This expectation is a bit at odds with the popular refrain that PCs are suffering as tablet sales rise. Wells Fargo seems to believe that seasonal improvement in PC demand and recovery in consumer PC end market, despite rising tablet sales, will help Intel (NASDAQ:INTC), AMD (NYSE:AMD) and Nvidia.

Our price estimate for Nvidia’s stock stands at about $20, implying a premium of about 50% to the market.  PC seasonality aside, we highlight three factors that can help boost Nvidia’s stock higher.

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1 – Continued Growth in Notebook GPU Attach Rates

Nvidia is benefiting increasing notebook GPU attach rates. ^[2] Despite the use of hybrid CPUs such as Intel’s Sandy Bridge, more notebooks are embracing discrete GPUs to provide high performance at reasonable price points.

This performance comes from the combination of a hybrid CPU with a discrete GPU. While this seems to be one of the catalysts as of now, the long-term viability of this trend is less clear. If hybrid CPUs by Intel and AMD close the performance gap with discrete GPUs, the attach rate trend for Nvidia could reverse.  However, given the demand for high-quality graphics, we don’t expect a quick reversal of this trend.

2 – Continued Strong Demand from Emerging Markets

The long-term PC sales outlook is not too bad given that emerging markets are making up for sales decline in developed markets. Just in the last quarter, China surpassed the U.S. in terms of PC shipments. ^[3] Our belief is that emerging markets have the capacity to continue to drive demand for PCs and consequently Nvidia’s GPUs.

3 – Recognition of Potential Value of PC CPU Business

We believe that the market may also not be reflecting the value Nvidia can derive from its PC microprocessor business in future. Nvidia’s stock jumped from about $15 to about $25 in January in large part due to the announcement that Nvidia was getting into the CPU business.

While this was an initial announcement and Nvidia’s first CPU shipment is still a while away, investors gave the business venture a lofty premium at the time. While we believe that the jump was excessive, we do think that the potential Nvidia CPU business has gone from being overvalued by investors to undervalued. Nvidia’s CPU business constitutes about 7% to our estimated price for Nvidia’s stock.

See our complete analysis for Nvidia’s stock here.

1. Nvidia raised to outperform by Wells Fargo, marketwatch.com, Aug23 2011 [↩]
2. Nvidia’s Q2 fiscal 2012 earnings transcript, SeekingAlpha [↩]
3. China Overtakes U.S. in PC Shipments, The New York Times, Aug 23 2011 [↩]