4 Reasons NVIDIA Is the Real Deal

by Susan J. Aluise | April 2, 2012 3:31 pm

4 Reasons NVIDIA Is the Real Deal

On the face of it, investing in a computer-chip company might seem to be one of the Nasdaq’s less appealing plays: shares were battered during the recession and fears of a “double dip” further delayed their comeback last year. Besides, the desktop PC market is in the doldrums. But time — and consumer trends — may be on the side of innovative companies like NVIDIA (NASDAQ:NVDA[1]).

For a company that has the unenviable task of playing the business world’s version of high-stakes video poker against Intel (NASDAQ:INTC[2]), Advanced Micro Devices (NYSE:AMD[3]), and Qualcomm (NASDAQ:QCOM[4]), NVIDIA needs to have an ace in the hole. Good thing it has two: its PC graphics chip systems for intense gaming and its high-test mobile processors for smartphones and tablets.

NVDIA’s most significant recent disappointment was the 32% earnings drop from its fiscal third quarter to the fourth, which the company reported in February. But that slip was related directly to a hard-drive shortage triggered by last year’s floods in Thailand[5]. Hard-drive production is bouncing back now and should return to normal levels in the second half of the year.

Focusing on key specialties

Tech stocks are well known for their fits and starts, but here are four reasons NVIDIA is the real deal:

Advanced Graphics Cards. Today’s highest margin opportunity for NVDA is in the PC graphics card market, where the company has a System on a Chip (SoC) that integrates graphics with multiple processors on a single PC card, boosting speed and graphics quality. The company developed its Kepler advanced architecture for these next-generation graphics processing units (GPUs), the first of which is the recently released GeForce GTX 680. These chips are not cheap and their biggest market is populated by intense gamers who need exceptional performance on 3D titles. PC Magazine pitted the supercharged video card against rival AMD Radeon HD 7970 and gave the win to NVIDIA.

Mobile Chips. NVIDIA’s biggest market opportunity is in mobile chips for advanced tablets and smartphones.  The market for mobile processors grew by 43% last year and is forecast to grow at an annual rate of 22% through 2016, according to new research from In-Stat. Advanced mobile chips are increasingly important because consumers are doing more demanding tasks on their smartphones and tablets such as streaming movies. NVIDIA’s edge here is with its Tegra 3, the industry’s first “quad core” mobile chip (it has four processors, boosting speed and performance). It also delivers a powerful mobile gaming experience and its performance is on par with Apple’s (NASDAQ:AAPL[6]) highly touted A5X iPad processor.

A $199 iPad Challenger. Word on the street is that NVIDIA’s chips will anchor a $199 Android tablet for Google (NASDAQ:GOOG[7]), which will be sold direct to consumers over the Web like Amazon’s (NASDAQ:AMZN[8]) Kindle Fire. It could hit the market as early as this summer. Industry insiders have long speculated that Google’s upcoming Nexus tablet would use the Tegra 3. A $200 tablet that delivers powerful video performance takes direct aim at Apple’s iPad and could be a game changer for the tablet market.

Jen-Hsun Huang. Taiwan-born NVDIA CEO Jen-Hsun Huang thrives on change. The former Ping-Pong champion holds a master’s degree in electrical engineering from Stanford and has what he describes as a “low tolerance for failure.” Cutting his teeth on microprocessor design at AMD, Huang co-founded NVIDIA in 1993. His company now has a market cap of $9.4 billion. He says that he learned one of his most important business lessons as a teenager competing in the U.S. national Ping-Pong championship in Las Vegas. Instead of resting up and preparing for the match, Huang wandered up and down the Strip all night, taking in the all the sights and lights. “To this day,” he told an interviewer, “I regret not being more focused on that tournament.” Count on Huang to focus like a laser on NVIDIA’s next big opportunity.

Bottom Line: Like all chipmaker stocks, NVDA struggled last year, but the company is coming back. The stock is trading just under $15.50 and has risen about 5% in the past week, driven by optimism about the growing acceptance of its state of the art processors for smartphones and tablets. While Qualcomm is still giving it a run for its money, AMD is stumbling.

The company is sitting on more than $3 billion in cash and has debt of less than $22 million. The stock is still reasonably priced relative to its value, and while it is likely to have a softer first quarter, the growth opportunity is promising. I like a long position in NVDA now.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

Endnotes:
  1. NVDA: http://studio-5.financialcontent.com/investplace/quote?Symbol=NVDA
  2. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  3. AMD: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMD
  4. QCOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=QCOM
  5. floods in Thailand: http://investorplace.com/2012/02/seagate-predicts-hard-drive-shortage-to-continue-in-2012-stx-wdc-tosbf/
  6. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  7. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  8. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN

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