While analysts were expecting a steep drop in NVIDIA's (NASDAQ:NVDA) earnings when the company reported its fourth quarter results, NVIDIA managed to significantly beat those estimates. Revenue rose on the strength of the company's GPU business, even though analysts were expecting a 5% decline, and guidance for next quarter surpassed the average analyst expectation. There was a lot to like about NVIDIA's results, and here are the most important parts:
PC gaming shows strength
NVIDIA's GPU revenue rose 14% year-over-year, driven by strong sales of high-end GPUs. Sales of GeForce GTX GPUs rose by nearly 50% year-over-year, reflecting strong demand from gamers. Revenue from notebook GPUs fell in line with the overall decline in the PC market, but the strength at the high end more than made up for the weakness at the low end.
This performance is particularly impressive given that competitor AMD (NASDAQ:AMD) released a new line of GPUs during the quarter, forcing NVIDIA to cut prices on some of its highest-end parts. AMD's GPUs were reportedly selling out after launch, but I pointed out in my NVIDIA earnings preview that demand from cryptocurrency miners was responsible for at least some of this demand, since AMD's GPUs are better suited for that particular application. Those sell-outs may have actually helped NVIDIA, since gamers were unable to find AMD's high-end cards available for purchase, and I suspect that this is part of the reason behind NVIDIA's strong gaming GPU performance.
A growing enterprise business
Revenue from NVIDIA's Tesla line of accelerator cards for high-performance computing applications grew by more than 20% year-over-year, with revenue from Quadro workstation GPUs rising by 4%. NVIDIA partnered with IBM during the quarter in a deal that will put NVIDIA's Tesla cards into IBM's servers, allowing for the acceleration of various enterprise applications, and this the represents first step for NVIDIA in capturing what the company has estimated to be a $3 billion annual opportunity.
Along with Tesla, NVIDIA's GRID virtualization technology is starting to gain steam. The number of enterprise customers evaluating the platform rose by 46% from the previous quarter, with the last reported number being around 200 customers. NVIDIA pointed out in its conference call that while the enterprise IT buying process is long, contracts tend to be long term. Once customers begin adopting GRID, it could become a major new source of revenue for the company.
The potential of Tegra
NVIDIA's mobile business, comprised of its Tegra line of mobile processors, declined by 37% year over year in the fourth quarter and by 48% for the full year. The Tegra division is responsible for both revenue and earnings declining during for full year, but 2014 looks quite a bit more promising.
Tegra 4, launched in 2013, failed to garner as many design wins as its predecessor. Part of the problem was that the Tegra 4 didn't include an integrated modem, making competing integrated products more desirable for OEMs. That all changes in 2014 with the launch of the Tegra 4i, a variant of the Tegra 4 that includes an integrated LTE modem.
Also set to launch this year is the Tegra K1. The K1, which was announced at CES earlier this year, is the first Tegra chip to be based on NVIDIA's desktop graphics architecture. The chip provides a huge increase in graphics performance compared to previous generations, and it should give NVIDIA the most graphically powerful mobile chip on the market when it starts shipping in devices later this year.
NVIDIA is targeting high-end devices, like so-called "superphones" and tablets, with these chips, and it's leaving the mainstream phone and tablet market to its competitors. Automobiles are another focus, with NVIDIA aiming to have Tegra power both in-car electronics as well as driver assistance features. This was a big focus of NVIDIA's CES talk, and the vast processing power of the Tegra K1 is perfectly suited for these types of applications.
So while the Tegra business looks grim right now, the potential is enormous.
Still an inexpensive stock
Even with Tegra draining profits, NVIDIA still produced $580 million of free cash flow in the full year, or about $1 per share. With roughly $5.70 per share in net cash, this puts the current stock price at just 11.5 times the free cash flow after backing out the net cash. With growth potential in all of NVIDIA's businesses, the stock seems significantly undervalued.
The bottom line
NVIDIA had an excellent quarter, with gaming GPUs showing strength even as the PC market continues to contract. The enterprise business is growing, with GRID being tested by a rapidly increasing number of potential enterprise customers, and the mobile business should have a much better year in 2014. NVIDIA remains an undervalued stock, and once the Tegra business becomes profitable, the company should return to earnings growth.