Is Licensing the Next Catalyst for NVIDIA Corporation (NVDA)?

As demonstrated by ARM, licensing can do wonders for gross margins. If NVIDIA can shift even a portion of the fabrication burden to its customers, it saves on capital expenditures, increases its own flexibility, and increases its cash for research and development. It also opens the door to deals with major players in the smartphone industry. Both Apple Inc. (NASDAQ:AAPL) and Samsung have a penchant for designing their own chips but also rely on heavily on a wide array of technology licenses. While NVIDIA hasn’t yet landed a big chip deal with either, its designs could work their way into the next blockbuster product.

The Drawbacks

The biggest drawback is the risk of cannibalizing their own sales. Since they’re starting with their newest generation, companies with the capacity might opt to license and fabricate themselves rather than buy ready-made chips. This is only an issue in the near term, if the licensing model is a success they can shift their resources away from production and more towards development.

As it stands, NVIDIA is already in a strong position. The company has cutting-edge intellectual property in an increasingly important market and a strong balance sheet. Add in the fact that the company has already committed to return one billion in capital to shareholders and you have a perfect storm for price appreciation. In the past quarter they only returned $146.3 million of their target, $100 million of it coming as buybacks and $46.3 million in dividends. If it gains any significant traction with its licensing approach it could be the catalyst it needs to continue appreciating.

The article Is Licensing the Next Catalyst for NVIDIA? originally appeared on Fool.com.

Chris Moore owns shares of Intel. The Motley Fool recommends Apple, Google, Intel, and NVIDIA. The Motley Fool owns shares of Apple, Google, Intel, and Qualcomm. Chris is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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