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Nvidia Reaches $21 On These Key Drivers

Nvidia awakened the world to computer graphics when it invented the GPU in 1999. From its roots in visual computing, the company over the years has expanded into parallel computing and mobile computing. Today its processors power a broad range of products from smartphones and tablets to supercomputers.

Fast growing market

Mobile computing is a fast growing market and Nvidia moved into this space previously than some of its competitors. According to technology firm Gartner, the worldwide mobile device sales to end users stood at 1.8 billion units in 2011, an 11.1% increase from 2010. It expects the overall market to grow by about 7% in 2012, mainly fueled by growth in smartphones and tablets. [1]

Nvidia has made significant progress in mobile computing so far this year. Its Tegra 3 earnings increased by nearly 50% in Q1 2012, and the company looks determined to continue the pace for the rest of the year. With the introduction of the Kai platform exactly designed to bring down prices of Android tablets, unveiling the world’s first Windows RT tablet, powered by its Tegra 3 quad-core processors at Computex 2012 and more recently confirming that its Tegra chips will power Microsoft’s new surface PC tablet – Nvidia has been eying the lucrative tablet market as a way of challenging Qualcomm’s growing smartphone dominance.

The rising smartphone adoption

The rising smartphone adoption and growing tablet sales will lead to more graphics usage from mobile gaming, mobile video, and mobile Internet. We expect this industry trend to be favorable to Nvidia’s mobile computing business in the end. Keeping in mind the company’s continued efforts to expand in this space, we expect Tegra related earnings to cross the $2 billion mark by the end of our forecast period.

The introduction of Sandy Bridge and Llano APU processors by Intel and AMD respectively, has put the integrated graphics chips and entry level graphics cards in jeopardy. Although they threaten the discrete GPU business of Nvidia, this division does not seem to have been affected as drastically as the integrated chipsets segment.

Recently, Apple announced that its new line of MacBook Pro will switch back to Nvidia graphics, reinforcing our belief that the company will retain a dominant share in the discrete desktop and notebook markets for the period in review. AMD remain the main rival for Nvidia in this segment, and we believe that the neck to neck competition between the two will make market share gains for either player unsustainable over the long-run.

The estimated revenue stream from Nvidia’s expected entry in the PC microprocessor segment, contribute close to 5% to our current price estimate for the company. Nvidia is developing ARM-architecture based CPUs, which could challenge the x86 CPU architecture that currently dominates the desktop, notebook and server CPU markets. Nvidia’s ARM-based CPUs are expected to come to market in 2013 and if successful, could be an industry disrupting move by the company.

Even even though the PC sales might be falling off the cliff in the developed world, the strong growth in emerging markets is expected to drive growth in worldwide sales. Additionally, growth in cloud computing and server virtualization/ consolidation will act as additional catalysts for the rise in global PC & server microprocessor shipments.

Lastly, if the expected growth in revenue from Tegra3 sales does not come about as expected, we could see a significant downside to our current price estimate of $20.98.

More information: Seekingalpha