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Why This Chip Stock Could Be an Outperformer

By Mukesh Baghel – Mar 14, 2014 at 7:00PM

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Mobile gains and computing growth place this chip maker in a good position to grow.

Santa Clara-based chipmaker NVIDIA (NVDA 1.44%) recently released strong fourth-quarter results. NVIDIA's stock has received a massive boost in the past year as the company continues to put in strong performances on the back of increasing sales of its graphics chips. Also, with a rebound in sales of its Tegra mobile chips, NVIDIA investors have found yet another reason to be optimistic about the company's prospects. In addition, NVIDIA seems to be gaining an upper hand on prime rival Advanced Micro Devices (AMD 0.13%), both in terms of market share and product development.

Positives all around
NVIDIA's recent results were decent, with quarterly revenue increasing 3% to $1.14 billion. Non-GAAP earnings amounted to $0.32 per share in the fourth quarter, up from $0.26 per share in the third quarter and well ahead of the $0.18 per share consensus estimate. This outperformance is expected to continue in the future since NVIDIA is riding on a lot of tailwinds, as we shall see.

First off, NVIDIA's GeForce business is performing quite well as a result of high-end PC gaming. The company sees good business opportunities in the future because of the launch of some excellent graphics-heavy games such as Call of Duty: Ghosts, Black Flag, Assassin's Creed IV, and Batman Arkham Origins. Further, NVIDIA is expecting better GeForce GTX sales in Asia due to the growing popularity of games such as Blade and Soul, which are resource-heavy compared to other games played in China. NVIDIA is looking forward to the boom in the PC gaming market, which is expected to hit $20 billion this year.

Also, NVIDIA has entered into a partnership with IBM (IBM 1.45%) for its Tesla GPUs, and this should strengthen its GPU business further on the enterprise front. The company has a lot of expectation from the Tesla GPU accelerators. The integration of Tesla in Europe's fastest supercomputer, as well as Ansys fluid, which is one of the most widely used commercial high-performance computing applications, indicates stronger performance from NVIDIA going forward. 

The presence of NVIDIA's Tesla in IBM's servers and enterprise hardware is good news for the chip maker. As Foolish contributor Timothy Green points out, IBM had to bring a differentiating factor into its hardware in order to perk up sales. IBM's Power systems, which are driven by IBM's Power architecture, faced a lot of weakness in the previous quarter, with sales dropping 38%. So, the integration of NVIDIA's GPU could drive sales of IBM's servers and hardware because of NVIDIA's expertise in accelerating hardware.

Tegra and GRID also gaining steam
Also, NVIDIA's GRID is also gaining momentum, with trials increasing 46% quarter over quarter. Further, in the mobile segment, it expects more from its latest Tegra K1, which is the first processor that delivers PC-class graphics, according to NVIDIA. Moving on, in the automotive segment, NVIDIA is seeing stronger adoption of the Tegra K1 because of deployment in driver assistance systems and self parking systems.

What is even more impressive is that NVIDIA has stolen a march over its arch-rival AMD, which was looking to make some foray into tablets with its semi-custom chips. AMD hasn't focused much on the mobile space, but lower sales of notebooks and computing chipsets are probably forcing it to look at other options, and the tablet space was one such option. However, with NVIDIA already releasing a reference tablet for the Tegra K1, it could leave AMD way behind in the race as tablet makers will have an early start if they are to integrate the Tegra into their devices.

Bottom line
NVIDIA is making a lot of good moves. The company looks to be in a good position to grow further with strong performances from its mobile and computing businesses, and innovations such as the Tegra K1. Finally, a dividend yield of 1.90% makes NVIDIA even more attractive, so investors should definitely look at this stock for their portfolio.

Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Nvidia. The Motley Fool owns shares of International Business Machines. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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