Nvidia Rising: Bulls Cheer Entry into LTE Market

There was a flurry of news reports today taking a generally positive view on Nvidia‘s (NVDA) announcement yesterday morning that its latest “Tegra” application processor, the “Tegra 4i,” which includes its first effort for a baseband processor part, is now sampling with customers. Nvidia shares are up 8 cents, or 0.6%, at $12.63, bucking a down market.

UBS’s Steven Eliscu today reiterates a Buy rating on Nvidia shares, and a $15.50 price target, writing that “As Tegra 4i could offer leadership in mainstream smartphones, assuming NVIDIA executes, especially on the Icera baseband, which has not been widely used in voice networks, it could present the most visible threat to Qualcomm (QCOM).”

We expect Tegra 4i to have in line margins (i.e. 50%+), enabled by its small 60mm2 die size, (25% smaller vs Tegra 4 or Tegra 3 � neither of which integrate baseband), and leading performance for the mainstream category. We are also encouraged by its ref design, which we believe is a requirement to grow its base.

Eliscu writes that the “key” is whether the 4i will be price-competitive with Qualcomm’s “Snapdragon 400” chipset and performance-competitive with its more powerful “Snapdragon 600.”

Miller Tabak’s Brendan Furlong reiterates a Buy rating on Nvidia as well, and a $17 price target, writing that “Nvidia is very well positioned to capture the high end of the Android and Windows 8 handset and Tablet opportunity.”

In addition, the company is ideally placed to capture what could be a significant market opportunity in ARM based notebooks. The redesign of the Windows OS to work on ARM processors (WoA) has opened a high value market to Nvidia. We see the company exploiting WoA in coming years with future iterations of the current Tegra chip [�] An important point on T4i is that the chip is half the size of QCOM (QCOM $65.67) Krait/S800 integrated chip. In addition, NVDA cited performance statistics that also put T4i ahead of the S800. For example NVDA says that SpecINT measures have the T4i 2.75x higher than the S800. Many of the recently announced enhancements to T4 have made their way into T4i. Computational photography image processing architecture call Chimera, High Dynamic Range (HDR) and Tap to Track photography all come as part of the T4i package [�] High end smartphones and tablets will still be targeted with higher end A15 based T4. For the mid range smartphone market with expected prices in a range of $100-$199 super phone processors like T4 will not be required. If NVDA can gain entry to the higher volume mid-range smartphone market it could grow smartphone revenues significantly. We think the T4 processor will stay focused at the tablet market and T4i will target smartphones. T4i has the size and power characteristics to win share in mid-range smartphones and the addition of an integrated baseband makes the offering very attractive to phone OEM�s.

Likewise, Brian Blair with Wedge Partners writes that the 4i “will position the company as a meaningful contender in the Smartphone segment in 2014″:

This announcement makes Nvidia a compelling play for those with a longer term 12 � 18 month time horizon, as this is the announcement that we (and many others) have been waiting for. Why? The 4i is a Quad-core CPU based on ARM Holding’s (ARMH) A9 platform. It represents the company’s best efforts on the GPU side, coupled with the Icera baseband and we expect it to be well received in the market. Likely early adopters of the 4i include Huawei and ZTE, but every win will be critical. Nvidia is boasting not only of the solution’s power efficiency, but also that the 4i is half the size of the nearest competitor, Qualcomm’s Snapdragon 800. That�s a meaningful plus in the age of ultra-thin devices.

Adds Blair, “in our view the increased competitive threat warrants some caution on 2014 LTE growth assumptions for Qualcomm. Next week�s MWC should also provide more details on this.

So who’s the spoiler? Patrick Wang with Evercore Partners reiterates an Underweight rating on Nvidia shares, writing that the company just suffered a “clear negative,” as he sees it, in having lost the socket for the HTC (2498TW) “One” smartphone, unveiled yesterday, which is powered by Qualcomm’s Snapdragon 600:

It�s too early to call how successful the 2.3GHz Cortex-A9 based chip will be given fast moving targets from QCOM, BRCM (BRCM), INTC (INTC), and MediaTek. Further, we believe early samples of the modem had thermal issues which would need to be addressed. As such, we continue to see a challenging road ahead � particularly in the backdrop of a shrinking merchant TAM (Fig 1, 2) and elevated op-ex (FY14E: +11% vs. revs -2%), resulting in negative operating leverage. MWC (Feb 25-28) ought to bring more updates and perhaps strategic OEM engagements.