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Nvidia Could Slide 4% on Soft PC Demand

Soft consumer PC demand in China and Europe hurt Nvidia sales in the second quarter of 2010.
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(NVDA) - Get NVIDIA Corporation Report

reports that soft consumer PC demand in China and Europe hurt sales of its discrete graphics processing units (GPUs) in the second quarter of 2010. Nvidia competes mainly with


(AMD) - Get Advanced Micro Devices Inc. Report

in the discrete GPU market.

We recently reduced the Trefis Price estimate for Nvidia's stock from $13 to $11.77. However, our revised estimate is still about 25% higher than the current market price. One key factor behind our relatively bullish outlook is that we expect Nvidia's profit margins to rebound in the near future on strong growth in the global PC market.

That said, Europe and China are the prime markets for Nvidia's GeForce processing units. We see a potential 4% downside to our stock price estimate if consumer PC demand continues sluggish in these markets. Our analysis follows below.

Desktop GPU Outlook

We estimate that Nvidia had a desktop GPU market share (by volume) of about 65.2% in 2009. We expect the company to retain this share going forward despite softness in the Chinese and European markets.

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Nvidia's GPU business suffered significant revenue declines last year. However, the market has responded well to the company's new GTX460 graphics card. Designed for desktop gamers, this product combines high performance with power savings at an affordable price.

The recent release of StarCraft 2 is also likely to draw significant attention from gamers, thus driving demand for GPUs. StarCraft is a popular real-time strategy game developed by Blizzard Entertainment. It has attracted an audience of 12 million players worldwide.

Because gamers tend to prefer desktop PCs, we believe that these developments should help Nvidia maintain its desktop market share going forward. You can drag the trend-line in the chart below to create your own desktop share forecast for Nvidia and see how it impacts the company's stock price.

Notebook GPU Outlook

We expect Nvidia's notebook GPU market share to decline slightly in 2010 and then recover in subsequent years. Notebooks are less popular than desktops in the gaming market, which suggests that the gaming market trends noted above will have less impact on Nvidia's notebook GPU sales.

The next interactive chart shows our forecast for Nvidia's notebook GPU share. You can drag the trend-line to create your own forecast and see how it impacts the company's stock price.

And what if demand stays soft?

If PC demand continues to be sluggish in Nvidia's core Chinese and European markets, the company could face downward pressure on its GPU market share and average selling price. Nvidia would likely cut GPU prices in an effort to offset market share declines, yielding a potential downside of about 4% to our stock price estimate.

You can see

the complete $11.77 Trefis price estimate for Nvidia's stock here.


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