Tesla Is 'Insignificant' to Nvidia

NvidiaNVDA 2.021687158469945%NVIDIA Corp.U.S.: Nasdaq^USD179.2317 3.55172.021687158469945% /Date(1506708652623-0500)/ Volume (Delayed 15m) : 10031449 P/E Ratio 50.79036827195468Market Cap 105407995605.469 Dividend Yield 0.31234313123989066% Rev. per Employee 810176More quote details and news » (NVDA: Nasdaq)
By Needham & Co. ($175.73, Sept. 28, 2017)

Nvidia is down about 6% over the past week in part due to the announcement from TeslaTSLA 0.9379858657243816%Tesla Inc.U.S.: Nasdaq^USD342.7854 3.18540.9379858657243816% /Date(1506708650488-0500)/ Volume (Delayed 15m) : 2970476 P/E Ratio N/AMarket Cap 56674823980.0232 Dividend Yield N/ARev. per Employee 566241More quote details and news » that it will source future infotainment chips from IntelINTC 0.63441712926249%Intel Corp.U.S.: Nasdaq^USD38.07 0.240.63441712926249% /Date(1506708649651-0500)/ Volume (Delayed 15m) : 9552660 P/E Ratio 14.588888888888889Market Cap 177763178604.126 Dividend Yield 2.862620479554587% Rev. per Employee 582179More quote details and news » as well as the rumor that the company could be designing an artificial intelligence chip for self-driving applications in house via a partnership with Advanced Micro Devices. AMD 0.47095761381475665%Advanced Micro Devices Inc.U.S.: Nasdaq^USD12.8 0.060.47095761381475665% /Date(1506708641795-0500)/ Volume (Delayed 15m) : 20924455 P/E Ratio N/AMarket Cap 12061964137.5475 Dividend Yield N/ARev. per Employee 563293More quote details and news »

We believe that the reaction to the announcements is overblown and psychological in nature as not only does Tesla (ticker: TSLA) represent an immaterial percentage of total revenue but the major driver to automotive growth is in autonomous driving, not infotainment. Telsa’s unit volumes are insignificant to Nvidia’s (NVDA) total automotive market opportunity. Tesla is expected to sell close to 100,000 vehicles this year. Even if we assume the company can hit its production targets of 500,000 vehicles exiting 2018 and 1 million by 2020, a very aggressive target compared to consensus estimates, the opportunity would pale in comparison to the approximately 90 million-plus vehicles produced annually by the rest of the industry.

Under the most extreme assumptions the missed opportunity for Nvidia would only represent 3 cents in non-GAAP earnings per share in 2018 -- ASPs of $100 (we believe $50 more likely particularly due to Tesla’s preference for in-house software development) and Model 3 unit volumes of 400,000 (Tesla estimates 500,000 vehicles exiting 2018, 100,000 of which to be Model S and X -- far higher than our own internal estimate of about 245,000 and consensus estimate of 220,000).

We see Nvidia’s automotive growth coming through unit sales and the proliferation of advanced driver-assistance systems (ADAS) systems -- where average selling prices (ASPs) are higher ($150-$250). In our analysis of Nvidia’s partnership with Toyota Motor7203.TO -0.18812709030100336%Toyota Motor Corp. ADRU.S.: NYSE^USD119.375 -0.225-0.18812709030100336% /Date(1506708471757-0500)/ Volume (Delayed 15m) : 62041 P/E Ratio 10.476772444530228Market Cap 195956455809.705 Dividend Yield N/ARev. per Employee 705787More quote details and news » (TM) we see a path towards $1 billion-$1.7 billion of incremental sales, or 35 cents-65 cents in EPS. Furthermore Nvidia has partnered with many of the major original equipment manufacturers (OEMs) and Tier 1s including: AudiNSU.XE 0.6382978723404256%Audi AGGermany: Xetra^EUR709.5 4.50.6382978723404256% /Date(1506702813000-0500)/ Volume (Delayed 15m) : 46 P/E Ratio 12.71733285535042Market Cap 30401000000 Dividend Yield 0.28188865398167723% Rev. per Employee 670706More quote details and news » (A8 first commercially available level three (L3) car uses Nvidia), BMW, BMW.XE 1.6702203269367448%Bayerische Motoren Werke AGGermany: Xetra^EUR85.83 1.411.6702203269367448% /Date(1506724521000-0500)/ Volume (Delayed 15m) : 1990981 P/E Ratio 7.392764857881137Market Cap 54929211489.3863 Dividend Yield 4.077828265175347% Rev. per Employee 782039More quote details and news » Mercedes, ZF, Hella and Bosch as well as the Volvo, AutolivALV -0.07291582273353317%Autoliv Inc.U.S.: NYSE^USD123.34 -0.09-0.07291582273353317% /Date(1506708603630-0500)/ Volume (Delayed 15m) : 180594 P/E Ratio 19.509493670886076Market Cap 10727795227.3297 Dividend Yield 1.9464720194647203% Rev. per Employee 166148More quote details and news » (ALV) and Zentry partnership. With about 225 Drive PX 2 partners we believe Nvidia can capture significant share of, in our view, an $8 billion ADAS total available market (TAM) by 2021. Assuming a 20%-30% market share we believe this could represent and additional $1.13- $2.26 EPS by 2020.

Growth in Tesla’s V100 Accelerators is accelerating following the announcement that major Hyperscale customers would be incorporating the company’s latest graphic processing units (GPUs) into their servers. Nvidia’s V100 GPUs provide up to 120 teraflops of deep-learning (DL) performance (equivalent of 100 central processing units (CPUs)) for DL training and inference applications. Dell Technologies (DVMT), EMC (EMC), Hewlett Packard Enterprise (HPE) and Super Micro Computer (SMCI) have announced products that incorporate Nvidia’s new architecture into their servers.

Nvidia’s HGX architecture has also been selected by Huawei, Inspur and Lenovo for Volta-based hyperscale data center systems -- allowing the companies early access to CPU computing technologies, designs, and architecture. HGX designs incorporate eight Volta GPUs in a SXM2 form factor with NVLInk high-speed interconnect and PCI Express.

-- Rajvindra S. Gill
-- Robert B. Mertens

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