NVIDIA’s Diversified Approach to Growth

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

I have been a GeForce fan for a long time. ATI’s Radeon graphics cards never won me over. NVIDIA (NASDAQ: NVDA) actually inherited me from 3dfx, as I was an owner of the Voodoo graphics card, though I had abandoned desktops after the Voodoo3 and only came back in the last five years. I own and use a desktop for gaming. I have been a follower of NVIDIA graphics technology for a long time, though I missed the whole Tegra thing while I was getting an education.

NVIDIA -- strong innovation but behind in integrated chips

I liked NVIDIA’s announcement about the Tegra 4, because it was about time. The Tegra 3 was getting a bit old. The new version sports the Cortex A15, which from all accounts is a beast of a chip. It is not really designed for phones, except the most high-end models. The Cortex processor and the Tegra system-on-chip in general is all about performance. It requires more power than alternatives like the Atom platform from Intel or Qualcomm’s (NASDAQ: QCOM) Snapdragon.

NVIDIA has still managed to provide a lot of processing power for minimal power, but with the Cortex A15, it just will not be as low-power in absolute terms as some others. Not everything is compared in relative terms. Having the fastest phone on the planet would be pointless if the battery drained in a minute.

Qualcomm has a fantastic line of chips for smartphones. That is why it is being installed in the new Samsung Galaxy S4 phones. That is a pretty high-profile socket, since it is considered the main competitor to Apple’s almost peerless iPhone.

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Despite the Tegra 4 announcement, NVIDIA is behind in some regards. The Tegra 4i is designed with an integrated LTE modem, but it is not going to be available till the end of 2013. You probably won’t see it in phones until 2014.

Qualcomm has had an integrated processor and LTE modem since the previous iteration of the Snapdragon. The Snapdragon S4 Pro is rumored to get the socket in the next Nexus tablet. Qualcomm stands alone with integration. The benefit of integration is that processing for internet tasks will be faster, giving you the feel of faster internet. It is also more power efficient.

Tegra 4 will be used here and there, but I think the best use I like for the chip is Project Shield. I say here and there almost dismissively, but it is a great product and should see success. I do not think it can compete with Qualcomm in smartphones due to the Cortex A15 sucking up the juice. Project Shield is NVIDIA’s handheld gaming system, but little else is known at this point. I do think Project Shield looks great, and it is part of the growth strategy.

Qualcomm is quite profitable, and is only seeing growth. With no debt, I think it is a fantastic company. Innovative, popular, and debt-free is a great combination. I would buy NVIDIA for reasons I will get into, but I would also buy Qualcomm for its potential in the smartphone industry. I have a positive long-term outlook on Qualcomm.

Acknowledging the sometimes silent victor

All these products can be linked to ARM Holdings (NASDAQ: ARMH). The Cortex A15 is their design, and Qualcomm’s Krait core is based on the Cortex A15 and is still ARM-based. The Opteron chip AMD is designing will use the next Cortex core. ARM does not manufacture its own chips. It designs them and then contracts out the manufacturing.

ARM has 95% gross margins and 25% net margins. It is a fairly profitable enterprise. It sports no debt. However, in the last 3 years it is up 302%. It has a P/E ratio of 76. By most measures, it can be called overvalued. The PEG ratio is almost 2. The market is aggressive in valuing ARM’s growth.

I would warn against ARM, except that the market it is in is growing. The demand for ARM chips or ARM-architecture is going up. The 64-bit Opteron chips that will go into the microservers will utilize 64-bit Cortex cores. I would hate to be averse to ARM and then have it grow to ridiculous levels.

There are a lot of companies that license the architecture and design their own chips, like Apple and Samsung. Qualcomm’s old core, the Scorpion, was its own design based on ARM’s architecture. Now it has Krait for Snapdragon, which is extremely similar to the Cortex A15.

If ARM can create fantastic designs, then it might sell more designs instead of just the architecture licenses. Based on its potential you might consider a small investment. I would definitely buy more if the market collapses and takes ARM with it. Do not buy more if just ARM collapses.

NVIDIA’s mostly flat stock is good

I apologize to those who have been holding NVIDIA forever, because it is not completely flat. It was at $15, but it is down to the $12 level now. It has been hovering around that level for a while now. I love stocks that are flat and have some growth still left. Coupled with the cash, dividend, and low debt, I think it is one of those stocks that will move fast when it finally does move. The market is on fire, but more importantly, it can be volatile.

NVIDIA’s revenue is growing, so its business is not hurtling into irrelevance. I like the success with the Tegra chips. I see a lot of promotions with video games that advertise “designed for GeForce” or something similar. I also think Project Shield will be a major part of the next paradigm shift in gaming.

NVIDIA does have the potential to move fast once it does get moving. Its 52-week high is $15.49, and I think it could go past that once the market is convinced of NVIDIA’s potential. You do not want to get bogged down if NVIDIA stays flat, there are also some macroeconomic concerns out of the EU. Be cautious with your position sizing, and consider erring on the side of caution even if you like NVIDIA. You might get a chance to have it cheaper.

Nihar Patel has no position in any stocks mentioned. The Motley Fool recommends NVIDIA. The Motley Fool owns shares of 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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