Graphics chip company NVIDIA (NASDAQ: NVDA) has had a good year. During the first nine months of 2014, revenue jumped by 15% year over year, while EPS rose by an impressive 57%. The stock has followed suit, spiking about 22% since the beginning of the year, beating the S&P 500's 8% gain by a significant margin.
Next year has the potential to be even better for NVIDIA. Here are three growth catalysts that could propel NVIDIA's profits and stock price higher in 2015.
The PC gaming boom
Despite general weakness in the PC market over the past couple of years, the PC gaming market has flourished. Sales of PC gaming hardware are expected to total $21.5 billion this year, doubling the size of the console gaming hardware market. By 2017, the PC gaming hardware market is forecast to grow to over $23 billion, fending off any threat from console or mobile gaming.
At the center of all of this is the GPU, and NVIDIA dominates the market. In the third quarter, NVIDIA managed a unit market share of 70% in the add-in board market, with competitor Advanced Micro Devices (NASDAQ:AMD) claiming the rest. NVIDIA has been slowly gaining market share over the past few years, and with AMD struggling to turn around its core businesses, NVIDIA clearly has the upper hand.
GPUs account for the bulk of NVIDIA's revenue, and continued growth in the PC gaming market should enable the company to increase revenue further in 2015. There is also opportunity to pick up more market share from AMD, particularly at the high end of the market. While high-end desktop GPUs represent just 10% of the market by unit count, they account for roughly two-thirds of the gross profit. Spending more on research and development than AMD, NVIDIA has pulled far ahead on power efficiency, which gives it a meaningful advantage going forward.
GPUs in the enterprise
GPUs are useful for more than just playing PC games. Modern GPUs, with a large number of specialized processors running in parallel, can provide massive performance boosts over traditional CPUs in certain applications. NVIDIA's Tesla line of GPUs is aimed at the supercomputing and high-performance computing markets, and while enterprise sales are still a small portion of NVIDIA's overall revenue, they're growing quickly.
Many of the world's fastest supercomputers contain NVIDIA's Tesla GPUs, and a recently announced deal with the U.S. Department of Energy will put next-generation Tesla GPUs in what will be the most powerful supercomputer in the world. Beyond supercomputers, Tesla is used to accelerate data analytics applications in a partnership with IBM. With the Big Data technology and services market expected to grow at a compound annual rate of 27% through 2017, this could be an enormous opportunity for NVIDIA.
NVIDIA's high-performance computing and data center revenue grew at a 64% CAGR from fiscal 2010 through fiscal 2014, which ended in January, rising to nearly $200 million. This number is higher today, and while growth will necessarily slow as the business becomes larger, there's a tremendous growth opportunity for NVIDIA in the enterprise market in 2015 and beyond.
The resurgence of NVIDIA's mobile business
NVIDIA's Tegra mobile processor, an ARM-based CPU coupled with powerful graphics cores, has had its ups and downs over the past few years. NVIDIA had some early success with the Tegra 3, but the delay in the Tegra 4, along with a focus on a version of the chip with integrated LTE targeted at the mass market, ended with massive revenue declines.
NVIDIA has recovered, though, by focusing its mobile business on applications in which its graphics expertise gives it an advantage. The Tegra K1, the newest iteration of the chip, is showing up in Chromebooks and tablets, including Google's Nexus 9 and NVIDIA's own Shield tablet. In addition to devices, NVIDIA has found success in the automotive market. NVIDIA's Tegra processors are already used to power the infotainment systems in cars such as the Tesla Model S, and the company is positioning the product as the brains behind driver assistance features and, eventually, semi-autonomous and fully autonomous vehicles.
NVIDIA's Tegra business is still losing money, but the segment has returned to growth, and those losses are narrowing. During the most recently reported quarter, Tegra revenue surged by 51% year over year; the segment recorded an operating loss of $52.3 million, compared to a loss of $64.2 million in the same period of 2013. NVIDIA could greatly increase its operating profit by bringing the Tegra unit to breakeven. While this likely won't happen in 2015, continued revenue growth could reduce the losses further, providing a boost to the bottom line. In the long term, the Tegra business offers another huge opportunity for NVIDIA.
Timothy Green owns shares of International Business Machines and Nvidia. The Motley Fool recommends Google (C shares), Nvidia, and Tesla Motors. The Motley Fool owns shares of Google (C shares), International Business Machines, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. 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.