How will the Chips play out for NVIDIA in year 2013?

Joel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Well, we all know 2012 has been quite good for NVIDIA (NASDAQ: NVDA) despite sluggish PC growth. It has seen continuous innovation in the GPU segment, which has kept this Santa Clara-based company resilient against all odds. The company has significantly grown its revenue in the consumer products business, from only 7% three years back to almost 30% of the total revenue. Over the last five years, NVIDIA’s earnings have grown 4% on an average. I find this company to be very promising in the days to come.

Opportunities ahead

NVIDIA has won a large market share in the tablet segment, mainly through the Google Nexus 7 and Microsoft’s Windows RT tablet launched in 2012. Until last year the company mainly had to fight against Qualcomm (NASDAQ: QCOM) in the smartphone front.  But this year Intel (NASDAQ: INTC) plans to introduce its Haswell range of CPUs, which would supposedly deliver up to twice the graphics performance compared to its earlier Ivybridge series, with the same power consumption as before. Intel is further coming up with its 22nm Atom processor to compete against the ARM CPUs.  Competition will definitely become more intense now.

The Tegra and the Icera

NVIDIA's Tegra 4 features 72 Custom GPU cores, Quad-Core Cortex-A15 CPU and LTE enabled with an optional Icera i500 chipset. The i500 Soft Modem baseband solution is capable of being reprogrammed in order to interoperate on a diverse range of networks. Until now, Tegra had lacked the integrated 4G LTE capabilities, but NVIDIA’s launch of such an integrated chip will soon solve the problem. Now that might cause the dragon to ‘snap.’

Apart from the high end smart phones, there exists a huge market for the mid- to low-end smartphones with integrated parts. In this context NVIDIA’s Icera i500 will be helpful, especially with the introduction of its first integrated processor ‘Grey.’

Project Shield

At a recent press conference NVIDIA announced a new portable gaming console named ‘Project Shield’ which will be powered by the Tegra 4 processor.  It will play both Android as well as PC games. Through this NVIDIA is offering gamers a hassle free solution so they can enjoy gaming on the go. But will this strategy help their GPU business avoid the slump in the PC industry? They are trying to cater to a niche market and compete with the likes of Sony, Nintendo, and Microsoft. It’s still too early to determine whether this strategy would be successful or not.

Dividends and possible buyback

The company paid a dividend of 7.5 cents per share on Dec. 14, 2012. NVIDIA is also to buy back shares worth $1.24 slated through December 2014. Buybacks are a great way for companies to deliver value to long term shareholders by way of reducing the number of shares available in the open market. That way, the value of these shares rise with scarcity. 

The Foolish bottom line

NVIDIA is continuously undergoing a change, diversifying from being a PC graphics expert to a chip (and console) maker for the upcoming market of smartphones and tablets. The balance sheet holds cash to the extent of $3.43 billion with almost negligible debt. The company expects to spend around $60 to $70 million during this fiscal year. It would also be required to spend huge sums on research and development, and we must not forget the cash dividend payments. The Tegra mobile processor and Icera baseband modem businesses are two of the most powerful weapons in the NVIDIA arsenal. We don’t know whether Shield will do well or not, but other mobile devices with better graphics and more powerful processors will definitely result in higher growth opportunities. 

rahelg has no position in any stocks mentioned. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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