NVIDIA Corporation Update

NVDA : NASDAQ : US$19.03

Target: US$19.00 


Technology — Hardware — Semiconductors and Related Technologies
Investment recommendation: We believe NVIDIA’s transformation from a
PC-leveraged GPU supplier to a growing, diverse visual-computing company
is complete. In fact, with focused investments in gaming and professional
tiers, PC platform GPU sales are still growing despite market headwinds.
Layering on new GPU applications in emerging markets including big data
analytics, GRID, and automotive, we believe NVIDIA is well positioned for
solid core growth. However, these new markets are still nascent and could
take time to drive meaningful growth considering the need to replace a large
patent settlement revenue stream expiring in 2017. Given the recent share
price move and this overhang to operating earnings, we cannot justify a
premium multiple. We resume coverage with a HOLD rating and $19 target.
Investment highlights
 Growth drivers: GPU sales should continue to outperform the PC sector
by focusing on premium gaming and professional development tiers. In addition, investments in software and Shield position NVIDIA strongly for emerging Android gaming platforms. New opportunities to leverage
NVIDIA’s core GPU technology in automotive and mobile (Tegra), cloud
virtualization (GRID), and high performance computing (Tesla)
applications are compelling and should generate high margin and sticky
revenue streams as these markets mature.
 Patent licensing strategy to replace current IPR stream yet to be proven:
Management is confident in plans to more broadly monetize NVIDIA’s
portfolio of over 7K patents. However, with a current IP settlement
stream from Intel of $66M/quarter set to expire in 2017, NVIDIA’s new
IP licensing program is tasked with replacing a substantial portion of
the company’s operating earnings. Until investors are given clarity
around timing and scope of future IPR, we believe NVDA shares could
have limited upside despite solid prospects for core and new business
growth, diligent expense controls, and more aggressive capital returns.
 Estimates: We introduce our F2015/16 revenue and non-GAAP EPS
estimates of $4.56B/$1.18 and $4.75B/$1.29, respectively.
Valuation: Our $19 price target is based on shares trading at roughly 15x
our F2016 non-GAAP EPS estimate



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