Is NVIDIA a Value in a Growth Business?

As the semiconductor market continues to shift toward the smartphone and tablet segments and PC sales plateau, there is constant jockeying for dominance. While Qualcomm (Nasdaq: QCOM  ) remains the industry leader and Intel (Nasdaq: INTC  ) the best value play, NVIDIA (Nasdaq: NVDA  ) has quietly begun to look like a bargain within this booming industry.

The company has been focused on both the tablet market and the low end of the Chinese smartphone market�, both of which offer significant growth potential. From the value perspective, aside from Intel, the company has some of the stronger metrics in the industry, particularly if it can find a way to bolster additional growth. Overall, the stock is an interesting third choice, in an industry that is deeply attractive.

The state of the market
The good news for NVIDIA is that the tablet market, in which it enjoys a significant position with its Tegra line of chips, is growing very quickly. Research firm IDC recently raised its projection for growth in this market in 2012 and beyond. The firm now expects the tablet market to grow �to 122.3 million this year, 172.4 million in 2013, and for there to be global shipments of 282.7 million units shipped by 2016. Tom Mainelli,�IDC's tablet research director, said: "Tablets continue to captivate consumers, and as the market shifts toward smaller, more mobile screen sizes and lower prices points, we expect demand to accelerate in the fourth quarter and beyond."

Beyond the top-line numbers is the shift occurring among operating systems. According to IDC, Android-based tablets are expected to grow their market share to 42.7% in 2012, up from 39.7% in 2011. Additionally, Windows-based tablets are expected to capture 2.9% of the market in 2012, growing to 10.3% by 2016. In a device segment that has been heavily favored by Apple (Nasdaq: AAPL  ) with its iPad line, NVIDIA benefits from Android success as its chips are in several Android devices, including the Google (Nasdaq: GOOG  ) Nexus 7.

IDC's Ryan Reith explains that "[t]he breadth and depth of Android has taken full effect on the tablet market as it has for the smartphone space." The ability of these devices to compete with Apple on price has been a major driver of the rise in Android market share. Mr. Reith notes the importance of the emerging markets: "Android tablet shipments will certainly act as the catalyst for growth in the low-cost segment in emerging markets given the platform's low barrier to entry on manufacturing. At the same time, top-tier companies like Samsung, Lenovo, and ASUS are all launching Android tablets with comparable specs, but offered at much lower price points."

Growth in the smartphone sector, in which NVIDIA struggles, has been just as explosive. Globally, sales growth has been tracked at 46% for the third quarter. Within emerging markets, however, this number reaches 63%. �A significant part of emerging-market growth comes from the very cheap end of the spectrum. Travis McCourt of Raymond James writes: "Essentially, there are parts of the world where a smartphone is simply a touch screen with an effective web browser, and in those parts of the world, Android is dominating."

Positioned for success
On a fundamental basis, NVIDIA looks to be in a strong position. The company's balance sheet reveals that it has roughly $5.50 per share on hand as cash, which aids the company's price-to-book of 1.66; shares are trading around $12.50 as of this writing. The stock is trading at a trailing P/E of 15.5 that, while trailing Intel at a P/E of 8.9, is more attractive than Qualcomm at 17.9 or the industry average of 18.3. The countervailing argument for Qualcomm is that the higher valuation is justified given the company's 18% year-over-year quarterly revenue growth and solid growth outlook -- NVIDIA had 13% year-over-year revenue growth. This translates into a PEG ratio of 1.0 from Qualcomm relative to 1.35 for NVIDIA; even Intel is stronger at a PEG of 0.83.

Relative growth remains one of the bigger challenges for the company in the sense that while the sheer demand for products in which the company's chips are included is rising, it must remain in the fight in order to stay on track. Strong growth in China coupled with NVIDIA's inclusion in Google tablets, as well as the recently released Microsoft� (Nasdaq: MSFT  ) Surface�, should be solid sources of growth. The focus on the cheap end of the smartphone market in the emerging markets�has the potential for success, but the company needs deeper penetration.

Still the biggest threat to NVIDIA is the decline in the PC market, where it is the dominant player in video cards. In the past three years, revenue from other sources has jumped from 7% to 30%�, with the company's Tegra chips gaining in importance. If the company can successfully make the next leap forward into the LTE market, it should be able to further bolster growth and become even more attractive. While I still prefer both Qualcomm and Intel, NVIDIA is very solid and is a great diversification play.

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