(NVDA) - Get NVIDIA Corporation Report

designs and develops graphics processing units (GPUs), which are high performance processors that generate realistic and interactive graphics on computers. The company competes with


(AMD) - Get Advanced Micro Devices, Inc. Report



(INTC) - Get Intel Corporation (INTC) Report

in the discrete and integrated GPU businesses.

Our Trefis price estimate for Nvidia's stock is $13.31, which is just below the current market price. We believe there are three key drivers investors should care about when looking at the Professional Graphics and Discrete Graphics businesses, which account for 55% of our stock value for the company.

We discuss these below and provide some scenarios to show you the sensitivity to each driver.

Discrete GPU Profit Margins

We breakout discrete GPU EBITDA margins (a measure of profitability), into discrete desktop and discrete notebook GPUs. Both have seen substantial declines in the past though we are seeing a recovery in 2010.

We currently forecast these margins to increase from an estimated 14% in 2010 to 22% by end of the Trefis forecast period.

However, there could be 15% upside to our price estimate if these margins were to increase at a faster rate and reach 33% (similar to 2007 levels) by the end of the Trefis forecast period.

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You can adjust both charts below to see the combined impact.

Professional Graphics Profit Margins

The EBITDA margins for this segment have been around 50% to 55% historically. However they faced a significant decline in 2009 due to pricing pressures resulting from the slow recovery in corporate spending.

We currently forecast pro graphics cards EBITDA margins to increase from an estimated 44% in 2010 to 52% by the end of the Trefis forecast period.

However here could be 6% downside to our price estimate if these margins were to remain around current levels of 44%.

Professional Graphics Market Share

While Nvidia and AMD compete for market share of discrete desktop and notebooks GPUs, the company has dominated when it comes to professional graphics cards.

We forecast slight declines in market share from an estimated 87% in 2010 to 84% by the end of the Trefis forecast period. We expect AMD to push further into this segment and could take share faster than we anticipate.

If market share fell to 70% in the coming years, there could be 5% downside to our estimates.

We believe these are the key drivers investors should watch as Nvidia'a stock price is fairly sensitive to them, and considerable uncertainty exists regarding future demand for these segments and Nvidia's ability to maintain market share.

You can see the complete $13.31 Trefis price estimate for Nvidia's stock



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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.