What Will 2013 Hold for NVIDIA?

Last week, NVIDIA (NASDAQ: NVDA  ) reported fourth-quarter and full-year fiscal 2013 earnings that beat analyst estimates on both revenue and earnings per share. Unfortunately, the market released an indifferent sigh as NVIDIA promised better days to come while at the same time providing light first-quarter revenue guidance of $940 million. As a result, though the numbers were solid, shares of NVIDIA seem to be stuck in neutral.

So what does the remainder of this year hold for the graphics chip specialist?

A year of records
Despite what the multiyear underperformance of its stock might indicate, fiscal 2013 was a banner year for NVIDIA. In fact, the company appears to be firing on all cylinders after setting multiple records during the year, including new high marks for annual revenue of $4.3 billion and GAAP gross margin of 52%.

NVIDIA also changed its financial reporting segments to better reflect its two primary businesses going forward: graphics processing units and Tegra processors.

To be sure, at first glance NVIDIA's GPU business looks weak after growing a meager 2% from the year-ago period. However, excluding chipset sales, which the company exited last year, GPU revenue actually grew a more respectable 8% as NVIDIA pulled the rug out from under struggling competitor Advanced Micro Devices, largely thanks to increasing GPU market share from 53% to 65%. In addition, NVIDIA also grew its notebook share from 47% to to a near-record 66%.

When all was said and done, Tegra, Tesla, and notebook GPUs all set new revenue records for the company, driven largely by 30% Tegra growth as Tegra 3 products sold into tablets and smartphones grew 50% from the year-ago period. 

Throwing in the towel
Even so, as fellow Fool Rich Smith pointed out last week, that still wasn't enough for analysts at Needham. They'd maintained a "buy" rating on NVIDIA since November 2011, but downgraded its shares to "hold" following the announcement.  

Why would they give up after pounding the table for more than a year? In addition to NVIDIA's underwhelming first-quarter guidance, Needham not only cited rising operating expenses outpacing revenue growth, but also complained of a "lack of meaningful Tegra growth" due to "limited traction in smartphones" and "share loss to Qualcomm (NASDAQ: QCOM  )  in Android-based tablets."

Connecting to new markets
Naturally, NVIDIA management did their best to circumvent these complaints during its earnings conference call, first pitching the operate expense increases as necessary investments to support the company's key growth strategies going forward. Sure enough, management stated the bulk of last year's operating expenses were attributable to employee and supporting infrastructure costs, as NVIDIA increased its total staff by more than 11% by adding 840 employees during the year. In addition, NVIDIA is keeping its current employees happy by initiating the company's first-ever 401(k) match -- an admirable move, as so many other companies have abandoned 401(k) matches in efforts to curb costs.

In addition, and to appease analysts' never-ending lust for more growth in the Tegra segment, NVIDIA was also quick to note its yet-to-be-released Tegra 4 processor already has more design wins than the Tegra 3 had in total. This supports NVIDIA's expectations for the segment to grow at a 50% clip for the foreseeable future, and, as fellow Fool Steve Heller suggested recently, much of that growth could be had at the expense of Qualcomm in the smartphone market.

And you can bet Qualcomm management is frowning this morning after NVIDIA released a press release announcing its first fully integrated 4G LTE mobile processor. According to the release, the aptly named Tegra 4i not only features 60 custom NVIDIA GPU cores, but also includes a new quad-core CPU which was jointly designed by both NVIDIA and ARM (NASDAQ: ARMH  ) . In addition, the solution is integrated with a new version of NVIDIA's previously announced i500 4G LTE modem.

As it stood, the i500 modem already represented the first significant bit of tangible progress from NVIDIA's 2011 acquisition of baseband and RF tech specialist Icera. Now, however, the Tegra 4i stands ready to give Qualcomm's products a run for the money as the first "single, integrated processor that powers all the major functions of a smartphone."

In fact, according to Stuart Robinson at Strategy Analytics, "NVIDIA's Tegra 4i appears to outperform the leading integrated LTE chip significantly, and also benefits from an integrated 'soft-modem' that can be reprogrammed over-the-air to support new frequencies and air interfaces -- something other modem vendors can only dream of."

Though the market once again seems indifferent, as neither NVIDIA nor ARM budged on the news, don't let that fool you (with a lowercase "f") into thinking this won't be absolutely huge for both companies.

Redefining gaming
Much to the chagrin of gaming console makers, you can also bet NVIDIA's new engineering resources will help to continue its crusade to foster a more open, platform-free gaming experience through its new GRID and Project Shield products. As I wrote last month, however, investors should be careful not to expect significant revenue contributions in the near future from either of these initiatives. To the contrary, Shield and GRID are much longer-term efforts by NVIDIA to once again redefine the face of the gaming world as it did by popularizing discrete GPUs in the first place.

Open promises
That's not to say NVIDIA can't afford to finance such long-term bets. At the end of last quarter, NVIDIA's cash and equivalents stood at a staggering $3.73 billion, even after buying back $100 million in stock and initiating its first-ever dividend of $0.075 per share. For those of you keeping track, that's almost $6 per share in cash, or nearly half of NVIDIA's total market capitalization. When we subtract all that dough, NVIDIA currently trades at just 7.5 times trailing earnings.

Perhaps this discount is well-deserved considering many investors remain skeptical NVIDIA can actually come through on its many promises. After all, while any investor should appreciate forward thinking as a necessary aspect to building great long-term businesses, eventually these businesses need to turn that thinking into reality.

In NVIDIA's case, however, I see nothing to indicate its stated goals are in jeopardy of falling through the cracks. In fact, given today's price (and if I weren't already fully invested), I'd be tempted to add to my position. Consequently, I'm more than happy to hang tight and collect NVIDIA's 2.4% dividend while I wait for my shares to rebound.

More expert advice from The Motley Fool
Care to learn more about NVIDIA? The Motley Fool's brand-new premium report examines NVIDIA's stumbling blocks, but also homes in on opportunities that many investors are overlooking. We'll help you sort fact from fiction to determine whether NVIDIA is a buy at today's prices. Simply click here now to unlock your copy of this comprehensive report.


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