Last week, chip maker NVIDIA Corporation (NASDAQ:NVDA) reported strong results for the fourth quarter of its 2013 fiscal year, but provided very weak guidance for next quarter. The weak guidance prevented NVIDIA shares from making a big move, although the stock did post a modest gain for the week. The modest Q1 outlook is the result of a product transition at NVIDIA that is being accentuated by a seasonal slowdown.
NVIDIA’s EPS will probably bottom out this quarter and then rise through the rest of the year as production of the new Tegra 4 mobile processor ramps up. Still, profit is not likely to exceed FY13’s total of $0.90 GAAP/$1.17 non-GAAP in the current year (fiscal year 2014). For investors, patience can be one of the hardest virtues to exercise. However, patience is exactly what NVIDIA investors need right now, as the company is poised for strong growth next year.
There are three main long-term growth drivers for NVIDIA (listed by order of importance): 1. mobile processors, 2. cloud-based GPUs, and 3. professional GPUs. GPUs are graphics processing units. With the Tegra line of mobile processors and Icera modems, NVIDIA plans to challenge QUALCOMM, Inc. (NASDAQ:QCOM) in powering smartphones and tablets. NVIDIA recently invented the cloud-based GPU with a product called “GRID”, which is just beginning to produce revenue. Finally, professional GPUs (the Quadro line of workstation graphics cards and the Tesla line of high-performance computing GPUs) have been a growth category for NVIDIA for a long time, and should continue to provide a tailwind for NVIDIA.
Tegra 4 to the rescue?
The biggest cause of NVIDIA’s weak Q1 forecast is the product transition from Tegra 3 to Tegra 4. NVIDIA introduced Tegra 4 at the Consumer Electronics Show last month, and the chip provides impressive improvements over Tegra 3. Most notably, NVIDIA is finally capitalizing on its graphics expertise for Tegra 4 with 72 custom GeForce GPU cores. The company has stated that it has already achieved more design wins for Tegra 4 than it did for Tegra 3. We are likely to hear about some of those design wins next week at the Mobile World Congress.
The near-term problem for NVIDIA is that it needs to offer an integrated mobile processor (which combines the application processor and modem on one chip) to be competitive in the smartphone market. While the tablet market is also very large, the top two vendors, Apple Inc. (NASDAQ:AAPL) and Samsung, design their own processors. According to IDC, Apple and Samsung combined to produce 59% of the 52.5 million tablets shipped last quarter. Thus, while NVIDIA had numerous tablet design wins last year, including two flagship devices — Google Inc (NASDAQ:GOOG)‘s Nexus 7 and Microsoft Corporation (NASDAQ:MSFT)‘s Surface RT — it was shut out of the best-selling tablets.
By contrast, NVIDIA’s management estimates the market for integrated processors with LTE at 150 million units this year, growing at 50% annually. As my fellow Fool Steve Heller recently observed, Qualcomm made an ambitious bet on integrated apps processors/LTE modems, which put it more than a year ahead of the competition. However, NVIDIA will have caught up by the end of this year with its “Grey” integrated mobile processor, allowing it to compete for high-volume smartphone design wins next year. At that point, Tegra sales growth should really take off, offsetting the heavy research and development expenses NVIDIA has been incurring for the past several years.
