Nvidia’s Ready for Redemption in 2012, Stock Worth $21
Nvidia’s (NASDAQ:NVDA) stock reached promising heights early in 2011 before falling to its current levels. The initial excitement generated by the launch of its dual-core Tegra chips and the announcement of Project Denver died down as Tegra sales turned out to be less than expected and the U.S. economic recovery came under threat from the European debt crisis. Furthermore the launch of APUs (accelerated processor units) by Intel (NASDAQ:INTC) and AMD (NYSE:AMD) further weighed on Nvidia’s stock as investors were worried that this could impact Nvidia’s GPU business.
Nevertheless we maintain our price estimate for Nvidia at $20.91, implying a premium of about 50% to the market price. The GPU business for Nvidia has not suffered, and we believe that stable attach rates and expected growth in IT spending in 2012 will favor Nvidia. Moreover, Nvidia’s expected entry in PC microprocessor market bodes well in terms of long-term value addition. Finally, the continued growth in smartphones and tablets will aid Nvidia’s mobile computing revenues.
See our complete analysis for Nvidia
GPU Business Is Solid
Professional GPU business constitutes about 30% to Nvidia’s value as per our estimates. We forecast professional graphics card unit sales to grow from an estimated 5.2 million in 2011 to about 8 million by end of our forecast period. A growing need of high performance computing, graphics intensive applications and expected growth in enterprise IT spending will help drive this demand. Although Gartner has lowered its 2012 estimates, it still expects IT spending to increase by about 3.7%. [1] We expect Nvidia’s share in this market to stay above 80% and thus the shipment growth will continue to benefit it prominently.
Although Nvidia’s integrated GPU business is phasing out as a result of launch of APUs by Intel and AMD, its discrete GPU business has not been affected. The company stated during its earnings release that its overall GPU attach rates remained stable, and for notebooks the figure actually increased. This implies that contrary to earlier expectations, the PC buyers still prefer to have a discrete GPU and not completely rely on graphics capability of Sandy Bridge and Llano APUs.
PC Microprocessor Business Potential
In early 2011 Nvidia announced Project Denver, under which it will develop ARM-based microprocessors to target desktop, notebook and server market. Although many have rejected the idea that Nvidia could possibly gain some share in this market, we note that revenue per microprocessor unit opportunities are much higher in PC market compared to smartphones and tablets. Even if Nvidia gains a small share, it will be able to earn significant profits.
Currently we forecast that Nvidia will have about 1.6% of the global PC microprocessor market by end of our forecast period. Despite such small share, the value contribution of this business amounts to about 7% of our estimated price for Nvidia.
Mobile Computing Growth Will Aid Revenues
Smartphones have registered a significant growth in 2011 and we expect this to continue in 2012 as well. Despite economic uncertainties, consumer shift towards smartphones continues to be strong. iPhone and and Android based smartphones have especially registered high growth. To add to this, tablets continue to grow at a fast pace. Gartner estimates that tablets have registered a growth of over 250% in 2011, and will continue to grow rapidly for next few years amounting to more than 320 million globally by 2015. [2]
Furthermore, Apple’s (NASDAQ:AAPL) dominance will slowly erode as tablets from other manufacturers gain traction. The above mentioned factors are likely to help growth of Nvidia’s mobile computing revenue, driven by the anticipated success of Tegra chips.
Risk – Failure With Project Denver, Intel’s Success With Atom, AMD Gaining Share
We stay positive on Nvidia’s stock due to aforementioned factors. However certain risks exist that can push down our price estimate.
Although Nvidia has proven itself with CPUs in mobile computing market, the case is different for PCs where Intel and AMD absolutely dominate. Thus, if Nvidia completely fails at gaining traction in this new market with its ARM-based microprocessors, it can shave off about 7% off our price estimate. Furthermore, risk exists if Intel’s Atom gains significant traction in smartphones and tablets, thereby slowing down growth of Tegra related revenues as Nvidia will get a smaller share of new sales. Additionally, if AMD can make a significant dent in Nvidia’s professional graphics business by gaining share, it can further push down our estimated stock price for Nvidia.
PC cannibalization by tablets presents both an opportunity and a threat to Nvidia. While the company could lose discrete PC GPU sales, it could gain in form of selling more mobile chips to be used in tablets.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- Gartner Lowers 2012 IT Spending Forecast To 3.7 Percent Growth, TechCrunch, Jan 5 2012 [↩]
- Gartner Says Apple Will Have a Free Run in Tablet Market Holiday Season as Competitors Continue to Lag, Gartner Press Release, Sept 22 2011 [↩]