Is Nvidia Corporation (NASDAQ:NVDA) A Good Pick For Your Portfolio?

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Nvidia Corporation (NASDAQ:NVDA) exceeded both topline and bottom-line expectations in F4Q2016. Revenue growth in the quarter was driven in part by strong demand for gaming graphics processors. At the recent Investor Day,  management provided an encouraging outlook, citing revenue opportunities in automotive, virtual reality and deep learning markets. Nevertheless, there is no doubt that Nvidia has a coupled of near-term challenges to cope with including muted demand for PCs and growing competition from Advanced Micro Devices, Inc. (NASDAQ:AMD) in the gaming graphics processor segments.

F4Q2016 highlight

Nvidia Corporation (NASDAQ:NVDA)’s F4Q2016 EPS reading of $0.35 was flat YoY but surpassed the consensus estimate of $0.32. Revenue of $1.401 billion expanded 11.9% YoY and topped the consensus estimate of $1.311 billion.

The chart below captures Nvidia’s revenue for the last five quarters:

Capture

F1Q2017

Nvidia is looking for F1Q2017 revenue of about $1.26 billion plus or minus 2%. Non-GAAP gross margin for the quarter is expected in the band of 57.2% to 57.5%.

What’s exciting about Nvidia?

  1. Virtual reality as opportunity waiting to happen

Nvidia Corporation (NASDAQ:NVDA) is looking to benefit from the rise of virtual reality content in the gaming space. The company hopes to leverage its high-performance graphics chips to capture the lion’s share of the market.

Nvidia has already talked about a shortage of virtual reality capable systems. Using virtual reality headsets such as Facebook Inc (NASDAQ:FB)’s Oculus Rift and HTC’s Vive require high-end PCs. The shortage of VR-capable systems is an opportunity that Nvidia is looking to tap.

    2.Smart automotive market

At the recent Investor Day, Nvidia’s management talked about a huge opportunity in the automotive industry. The management is modeling up to $10 billion revenue opportunity in the digitization/modernization of vehicle dashboards and implementations of autonomous driving capabilities in cars.

Nvidia is already working with Tesla Motors Inc (NASDAQ:TSLA) in automotive-themed chips for automation of many features in the latter’s all-electric vehicles.

     3.Artificial intelligence capable systems

Nvidia Corporation (NASDAQ:NVDA) is hoping to ride the wave of deep learning explosion. Computers are increasing being trained to make sense of desperate data and that has created demand for visual systems such as the ones that Nvidia develops. As such, the management of Nvidia is focusing on tapping into the artificial intelligence market by providing systems that support high-quality visual processing in supercomputers.

As part of the efforts to grab the opportunities in the AI market, Nvidia recently announced a range of new products based on its next-gen Pascal architecture. Those products include Tesla P100, which is based on 16nm FinFET technology. It also announced DGX-1, which geared towards deep learning supercomputers. DGX-1 is packed with several P100 GPU systems.

    4.Licensing of graphics IP

Nvidia has noted a shift in its industry where Qualcomm, Inc. (NASDAQ:QCOM), Intel Corporation (NASDAQ:INTC) are increasingly encroaching into its graphics processors market with low-cost alternatives and hybrid renderings. The entry of these rivals into the graphics processors market is making it difficult for Nvidia to sell its own line of top-end chips.

To combat this challenge, the company has decided to license its graphics IP to third-party manufactures. The strategy should allow the company to unlock new revenue that it can then use to offset its own manufacturing costs, thus helping to protect margins.

Additionally, licensing of technology could also accelerate the adoption of Nvidia’s graphics chips in high-end mobile devices.

    5.SHIELD gaming program

Nvidia Corporation (NASDAQ:NVDA) is using its own line of gaming devices to offset the impact of the loss of major gaming sockets. AMD has locked Nvidia out of Sony Corp (ADR) (NYSE:NSE)’s PS4 and Microsoft Corporation (NASDAQ:MSFT)’s Xbox One.

Nvidia produces a 5-inch touchscreen handheld gaming device that runs Android Jelly Bean. The SHIELD handheld device comes with multiple controls and can connect through Wi-Fi or Bluetooth. To expand its line of native gaming devices, Nvidia recently launched SHIELD tablet. The device boasts 8-inch display and runs Android. The SHIELD tablet is targeted at avid gamers. Nvidia is planning or rolling out LTE version of its gaming devices that it can sell through third-party distributors like AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ).

Nvidia is expanding its portfolio of Android-based gaming devices at a time when it is reported that Android gaming increased at compound annual growth rate of 52% to $6.7 billion in 2014.

    6.The Tegra processor line

To cut its reliance on PC, Nvidia has been seen rolling out new processors for multiple applications. Its 256-core Tegra X1 processor can be used by developers to build apps that can run on PCs, gaming consoles, tablets, smartphones and television.

Nvidia’s Tegra chips are showing great potential as they address processor needs for multiple markets from automotive to robotics to mobiles. Interest in Tegra chips is also growing. Google uses Tegra chips in Nexus 7 and Project Tango tablet. Microsoft uses Tegra in Surface tablets and Xiaomi uses them to power its tablets.

Tegra could help Nvidia push back against AMD, Intel and other competitors.

What’s worrying about Nvidia?

  1. PC market decay

Although Nvidia Corporation (NASDAQ:NVDA) is trying to offset the impact of weak PC market with increased focus on the mobile market, the company remains greatly exposed to the decaying PC industry. Gartner reported that PC shipments in 2015 fell 8% from 2014. Competition from mobile devices, longer PC lifecycle, stronger U.S. dollar and refugee turmoil in EMEA are believed to have contributed to the continued weakness in PC sales in 2015.

     2.Risky customer concentration

Nvidia relies on a small group of customers for a significant portion of its revenue. That poses serious risks because a loss of a single customer can shake the core its topline. Additionally, the high customer concentration means that the company is under pressure to impress customers so that they don’t decamp. But that can eat into margins as Nvidia cuts prices to keep key customers.

    3.Intense competition

AMD is giving Nvidia Corporation (NASDAQ:NVDA) a serious run for its money in the graphics processor market. Microsoft, Sony and Nintendo have all fallen in love with AMD’s GPUs for their next-gen gaming consoles. In the app processor space, Nvidia is also not lucky as the scene is being dominated by Qualcomm and Samsung.

Capital deployment

Nvidia Corporation (NASDAQ:NVDA) is targeting to return $1 billion to shareholders in F2017.

Takeaway

The management of Nvidia Corporation (NASDAQ:NVDA) is optimistic about the future. But optimism alone is not enough if not followed by scrip execution.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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