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NVIDIA is firing on all cylinders!

August 12, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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Just yesterday, the colossal graphic chip make Nvidia (NVDA) revealed certain details about the Tegra K1 “Denver” chip that features Nvidia’s “Project Denver” processor which is based on ARMv8 architecture. While this second version of Nvidia’s Tegra processor is yet to hit the markets, the already existing 32-bit, ARM cortex-A15 quad processor is available on a handful of devices including the Shield Tablet.

Tegra: The achiever

In the second quarter of 2015, Nvidia’s mobile Tegra processor sales surged a phenomenal 200% year-over-year led by the growth in mobile devices and automated infotainment systems. Before we enter into discussing the potential of Tegra K1 Denver chips, let us take a few moments to discuss the results for the second quarter. The company posted a strong growth in Q2, 2015 as revenue came in at $1.1 billion, a 13% jump over last year and in accordance with the company guidance. Also, Nvidia reported record gross margin of 56.1% (up 130 basis points sequentially) owing to comparatively better margins in its PC gaming chips business, datacenter and cloud platforms. A stabilizing demand in PC industry also impacted Nvidia’s earnings to a certain extent.

It is quite clear from the second-quarter results that Tegra processors have the capability to escalate revenue for Nvidia and therefore, analysts are excited about the launch of the second version of this processor. Just to give a bit of context, Denver chips implements an innovative process called Dynamic code optimization which optimizes frequently used software routines into highly tuned microcode- equivalent routines. The primary advantages of this type of technology are that it effectively doubles the performance of base-level hardware, increases the execution energy efficiency and provides the time gain by having an already optimized code ready to execute.

GPU business is booming

Even though there are other companies that are also working on the ARMv8 technology but Nvidia will gain the first mover advantage as it is almost ready to launch the product. Thus, in a burgeoning mobile market coupled with stabilization in the PC demand, Nvidia is in a sweet spot to leverage the opportunities. Besides the reasonable growth in mobile Tegra business, the company also scored commendable growth of approximately 10% in revenue from its GeForce GPUs for gaming desktops and notebooks.

It is significant to understand that PC gaming still occupies around two-fifths of the entire gaming market and the GeForce GPU sits at the center of the PC gaming ecosystem and as per the company, its new entry level GeForce GTX GPU delivers the performance of the latest generation consoles, making the GeForce gaming PC the largest target for developers of latest generation games. Also, Nvidia is now all set to launch a new version of GeForce called the GTX 800 series graphics for PC gaming this fall, and it should boost its revenue from the huge PC gaming market.

There is no doubt that Nvidia has reported a robust performance and in comparison to its rival Advanced Micro Devices (AMD) which is struggling to maintain sustainable growth, Nvidia has scored the big buck. Expecting this trend to continue, Nvidia expects third-quarter revenue to come in at $1.2 billion – i.e., an increase of around 14% y-o-y and gross margin might slide slightly to around 55.2% (GAAP basis) owing to the higher presence of Tegra processors which carries lower margin, in the sales mix. Considering the growth Nvidia is seeing in its PC gaming as well as mobile chips business, this seems quite achievable.

Additionally, the enterprise market is also a source of growth for Nvidia. The world's 15 most energy efficient supercomputers are all powered by Nvidia's Tesla GPUs, and given that Nvidia's proprietary CUDA platform is used to harness the power of Tesla, there is a stickiness to Nvidia's enterprise products that should help the company maintain its market share going forward.

Takeaway

In conclusion, it can be said that Nvidia has exhibited brilliant performance in the second quarter, and the guidance given by the management exudes optimism going into the rest of the year. Also, the company is under minimal threat from rival AMD and has the first mover advantage in ARMv8 based chips that are going to be launched soon. Though the stock is slightly overvalued at a PEG ratio of around 3.11, it is still a valuable buy considering the massive opportunities lying in store.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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