Chip-making company NVIDIA (NVDA, Financial) ended its fiscal 2014 by reporting better-than-expected fourth quarter revenue and earnings. The credit primarily goes to the PC gaming segment which somewhat compensated for the dying PC market. Improved spending in the PC gaming space drove the demand for the company’s graphic chips. Could this act as a catalyst for the company’s growth? Let’s delve a little deeper into the quarter figures and check out the chipmaker’s future prospects.
Source: Company website
Going Deeper
Nvidia reported fourth-quarter adjusted earnings of $0.32 per share, which decreased 9% from the year ago quarter but were superior to the analyst expectation of $0.18. The California-based company registered $1.05 billion in net profit for the quarter, which was better than Wall Street’s expectation. Higher demand for its product was somewhat offset by higher expenses and tax rate.
Revenue increased 3% year over year mainly due to traction in its core businesses — graphic processing unit (GPU) and Tegra processor. The chip designer’s GPU business rose 14% to $947 million, which is remarkable given the dull PC market. The company’s cloud, enterprise and mobile segment saw decent growth, but gaming turned out to be the key revenue driver. Sales of GeForce GTX GPUs (gaming chip) grew roughly 50%. The growth came from a host of newly launched graphically intensive games from key players like Activision Blizzard (ATVI, Financial) and Ubisoft (UBSFY, Financial).
Apart from GeForce, performance of Tesla (for high performance computing), Quadro (for web designing) and GRID (for cloud computing) chips were satisfying. Tegra processors saw pent-up demand from the automobile space, which somewhat helped to offset lower deployments in the mobile devices.
Adjusted gross margin increased 60 basis points to 53.8% and was driven by sales of high-margin GPUs.
Source: Company website
Gaming: the Key Driver
Nvidia’s fourth-quarter was mostly driven by increased spending on gaming, particularly on PC gaming. Technology research firm Gartner expects the overall video game industry to earn more than $111 billion in revenue, up from $78.9 billion in 2012. Although video game consoles will continue to lead the market, the growth rates of mobile gaming and PC gaming are considerably good. By 2015 mobile gaming and PC gaming revenues could reach $22 billion and $21 billion, respectively. Nvidia’s chips are used in consoles, mobiles and PCs for playing games that expose the company to a whole lot of opportunities in the gaming space.
In addition, Nvidia generated most of its GeForce GTX revenue from China, one of the world’s largest markets for PC and mobile gaming that generated $14 billion in revenue from the gaming market in 2013. With solid presence in the region, the company seems well-positioned to benefit from China’s gaming market.
Moreover, the chip designer launched a mobile processor Tegra K1 "super chip" last month, to boost mobile gaming experiences. The Tegra K1 would compete with Apple (AAPL, Financial)'s A7, Qualcomm (QCOM, Financial)'s Snapdragon 800 and Intel (INTC, Financial)'s HD 4400 chips.
Testing the Automobile Space
Apart from gaming, it is also targeting the automobile industry. German auto giant Volkswagen (VLKAY)'s Audi will feature Nvidia’s Visual Computing Module to develop technologically advanced dashboards with smart displays. Audi's global sales reached 1.58 million vehicles in 2013, much ahead of its plan. The automaker is planning to add more shifts to meet the growing demand, which suggests higher orders for Nvidia’s chips.
Going Forward
Nvidia is on a mission to shift focus from the declining PC industry and diversify in the gaming and automobile spaces. This will allow the tech player to shun the losses from the declining PC market easily. The graphics chipmaker is expected to gain from the rising popularity of gaming which is going to be the primary driver in the coming quarters.
