Nvidia ready for redemption in 2012
Stable attach rates and expected growth in IT spending should favor the chip designer.
The launch of accelerated processor units (APU) by Intel (INTC) and AMD (AMD) further weighed on Nvidia's stock as investors worried that this would affect Nvidia's business in graphics processing units (GPU).
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 into the PC microprocessor market bodes well in terms of long-term added value. Finally, the continued growth in smartphones and tablets will aid Nvidia's mobile computing revenues.
Professional GPU business constitutes about 30% of Nvidia's value, according to our estimates. We forecast professional graphics card unit sales to grow from an estimated 5.2 million in 2011 to about 8 million by the end of our forecast period. A growing need for 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%. 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 the 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, PC buyers still prefer to have a discrete GPU and not completely rely on graphics capability of Sandy Bridge and Llano APUs.
In early 2011, Nvidia announced Project Denver, under which it will develop ARM-based microprocessors to target the 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 the 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 the end of our forecast period. Despite such a small share, the value contribution of this business amounts to about 7% of our estimated price for Nvidia.
Smartphones have registered a significant growth in 2011 and we expect this to continue in 2012 as well. Despite economic uncertainties, the consumer shift towards smartphones continues to be strong. iPhones and Android-based smartphones have especially registered high growth. To add to this, tablets continue to increase sales at a fast pace. Gartner estimates that tablets have registered a growth of over 250% in 2011, and demand will continue to expand for the next few years, climbing to more than 320 million globally by 2015.
Further, Apple's (AAPL) dominance will slowly erode as tablets from other manufacturers gain traction. These factors are all likely to help the growth of Nvidia's mobile computing revenue, driven by the anticipated success of Tegra chips.
Although Nvidia has proved itself with CPUs in mobile computing, the case is different for PCs, where Intel and AMD absolutely dominate. Thus, if Nvidia completely fails to gain traction in this new market with its ARM-based microprocessors, it could shave off about 7% off our price estimate. Furthermore, there is also a risk should Intel's Atom gain 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 would 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 also gain by selling more mobile chips for use in tablets.
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