- Nvidia has been one of the better-performing semiconductor chip stocks YTD.
- Nvidia's high-end GPUs are likely to gain string traction due to rapidly growing virtual reality industry.
- Meanwhile the company's Tegra chips will see strong demand from from the smart car industry.
- Nvidia has good long-term growth drivers making it a good investment.
Shares of leading GPU gaming processor manufacturer, Nvidia (NASDAQ:NVDA), have been among the better-performing semiconductor chip stocks in an otherwise depressed market. Nvidia stock is up 17.4% YTD vs. -10% for the semiconductor chip industry. Nvidia stock was down 2.72%, closing at $22.89, on Tuesday, 22nd September.
Nvidia vs. SOXX YTD Share Returns
Source: CNN Money
Nvidia is the undisputed leader in gaming GPUs where it holds a 75% share of the market. About 82% of the company’s revenue comes from selling gaming GPUs. Nvidia has two promising industry trends that have real potential to drive growth for the company: augmented and virtual reality gaming, as well as smart cars.
Augmented/Virtual Reality Gaming
Augmented reality and virtual reality gaming are some of the most promising commodities in the world of digital gaming at the moment. Large tech companies have been investing in AR and VR--Facebook (NASDAQ: FB) recently bought Oculus Rift for $2 billion while Google (NASDAQ: GOOG) (NASDAQ:GOOGL) paid $542 million or Magic Leap. Meanwhile, Microsoft (NASDAQ: MSFT) continues to forge ahead with HoloLens.
Both AR and VR put the user in a virtual world, the main difference being that AR is open and semi-immersive while VR is closed and fully immersive. AR and VR headsets provide the user with ultra-high definition video and audio, and require high-end chips to provide the required performance. The AR and VR industry today is still infantile, much like the smartphone industry was prior to Apple (NASDAQ:AAPL) launching its first iPhone.
But the industry could be on the verge of an explosion, if current estimates are any indication. Digi-Capital estimates that the AR/VR gaming market will jump from around $1.4 billion currently to $120 billion by 2020.
Source: Tech Crunch
The stakes are huge for the early marketer leaders, and Nvidia is beginning to look like one of them. Oculus Rift has already recommended pairing its first Rift VR headset, which is to be launched during the first quarter of 2016, with Nvidia’s latest GPU, GTX 970. Jefferies' Mark Lipacis has predicted that:
" Nvidia’s GPUs will be the processing engine for a new slate of Virtual/Augmented reality products introduced over the next 3-to-12 months.’’
Nvidia’s Tegra processors contribute about 13% to the company’s top line, making it the company’s second largest segment. When Nvidia launched the first Tegra processors about 5 years ago, the company had a vision to integrate its chips in smartphones and smart cars and everything in between. Unfortunately, the company, just like mighty Intel (NASDAQ: INTC), struggled to break into the highly competitive smartphone market, and finally exited the business early this year when it announced it had put up its Icera Baseband division for sale.
The Tegra processors segment has lately been underperforming due to the loss of the 3G/4G processor business, as well as Nvidia’s recall of 88,000 defective Shield tablets during the first quarter. During the second quarter, the segment reported revenue of $128 million, 20% lower than the prior year period. The segment, however, has a silver lining--automotive business. Nvidia’s automotive business brought in revenue of $71 million during the second quarter, good for 76% Y/Y growth. Nvidia’s Tegra processors have already been fitted in 8 million vehicles, and the company sees another 25 million vehicles sporting the chips over the next couple of years.
Lately there has been a resurgence in smart cars, which is good news for Nvidia. A few days ago, WSJ reported that Apple was stepping up its self-driving car efforts and expected to launch its first fully autonomous car in 2019, a year earlier than prior estimates. Audi expects to launch its first fully autonomous car in 2017. About a week ago, ten leading U.S. automakers representing 57% of U.S. light vehicle sales, reached an agreement with the NHTS and IIHS to make collision avoidance systems standard in their upcoming auto models. Nvidia is one of the leaders in self-driving and semi-autonomous vehicle technology and the rising demand for smart car chips should give a considerable boost to the company’s Tegra division.
Nvidia has two key processor segments that hold a lot of promise for the near future. Trading at a PE ratio of 25, the shares still look fairly valued. Although Nvidia earnings are expected to drop in the current fiscal year, the outlook for Nvidia Stock over the next 3-5 years is good.