Is Nvidia on the Path to Recovery?
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Nvidia (NASDAQ: NVDA) had a tough time last year and its stock tumbled more than 15 percent. However, the company and its stock have performed well this year so far. It bucked the industry wide trend and posted annual revenue growth for fiscal 2013. Nvidia’s revenue for the year touched $4.3 billion figure and it also managed to increase its market share in key business segments.
While the semiconductor segment is struggling, Nvidia is rather well placed to weather the storm. Its major revenue comes from mobile chips and now the company is revamping its business structure as well. With its GeForce line, Nvidia is looking to capture gaming market. While the current top 2 gaming consoles viz. PlayStation and Xbox rely upon Advanced Micro Devices (NYSE: AMD) for their GPU requirements. Instead of competing directly with AMD by trying to poach the console makers, Nvidia is looking to tackle the market in a new way with its Project Shield. As demonstrated during the latest edition of Consumer Electronics Show, the company plans to launch its gaming console, directly competing with handheld devices such as PSP.
The console will come equipped with Tegra Chip, which ironically was the reason for Nvidia’s withdrawal from supplying GPUs to Sony and Microsoft. The company was willing to augment its mobile chip business and focused on developing Tegra line. Now, it is using the product of its strategy to capture the gaming segment in a different way. The device is set to be launched in the second quarter. At this point it is difficult to quantify the impact of the launch on the company’s top line as Nvidia did not disclose pricing. However, in any case, the new development will help in vertical integration for the company and open new avenues to grow. Nvidia’s GTX Titan also sold out, again a good omen for the company.
Nvidia stock has finally snapped out of its loss making streak and is in positive territory for this year so far. In Q1, the results are expected to be flat, owing to the cyclical nature of the business. However, Nvidia improved its margins in the previous year, which is a good sign for a company engaged in otherwise struggling segment.
Its new Tegra 4 processor is also winning rave reviews and is expected to perform well when it hits the market in the second quarter of the year. Nvidia has firm grip on tablet market, which is expected to show CAGR of 18 percent through 2016, according to a report released by IDC. With Tegra 4i Mobile chip, the company is also expanding its reach in LTE market, where it has been lagging so far. Qualcomm Incorporated (NASDAQ: QCOM) is an undisputed leader in LTE chip segment with 86 percent market share in 2012. With Tegra 4i, Nvidia is finally in the position to challenge the stronghold of Qualcomm, despite the fact that it will receive stern competition not only from Qualcomm, but also from Intel, which is planning for a whole new range of Atom based processors to capture mobile computing segment.
Tegra 4i comes with various new features including integrated soft modem. Apparently, the chip may be embedded in cameras to enhance their performance. In this way, the chip is more versatile than its Qualcomm counterpart Snapdragon. However, Qualcomm is on the verge of releasing new Snapdragon 800 series, which is expected to provide tough competition to Tegra 4i.
Nvidia also has strong balance sheet and financials. It also seems to be in the mood for some extravagance as it recently announced its plans for a new headquarter. While the company did not elaborate about the expenditure involved, it is highly likely that the company is able to afford splashing around a bit. However, it also needs to be on its guards as the company is showing worrying trend of increase in its operating expenses, putting pressure on its bottom line.
Nvidia now clearly divides its business in Tegra and GPU segments. The new classification will help it in focusing its resources and plan in a better way. With just 4.71 percent gain so far in the year, the company stock is still underperforming broader markets. Despite strong results and healthy product pipeline, the market seems to have unwarranted pessimism towards the stock. In order to make up for the shortfall in stock market, the company paid dividends to return some value to the investors. It also has share buyback program in place, though, it has not made any such repurchase since 2008. Its stock trades at P/E ratio of 14, lower than industry standard and shows that the stock has good upside to it. Its new soon to be released product may just turn out to be the right kind of catalyst to propel its stock prices upward.
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