Let’s say we’re in another positive cycle of better times for Micron. We’ve been through them before; the most notable and mind-altering one was in the mid-1990′s. Although it got eclipsed by the Internet bubble a few years later, it was a heady time and everyone wanted to own Micron.

The problem for me as a growth investor is that Micron seems to be just a new-age commodity company. Memory sizes are growing so Micron will ship far more “bits” every year. But thanks to advances in density they are basically shipping the same number of chips. (Micron fans will point out that they are expanding lines and shipping more chips but let’s just think about it like the “same store sales” model. In that analogy Micron grows by adding stores but the stores themselves don’t grow.)

To put a consumer perspective on it I buy a USB key or two every year for the family and pay around $10. So it’s the same $10 per year over many years. Not a bad business if you consider the millions sold but not growing either. It’s true I get a 4GB or 8GB key now versus the 128MB I was getting a few years ago but Micron had to bear the capital investment and development cost to get my $10 again.

Of course Micron sells other types of memory but it’s all the same. You get one or two sticks of RAM for your laptop and they just have twice as much memory on them every year. Same two sticks, same price as long as you don’t try and buy at the tip top of the density curve.

In some ways it reminds me of EMC. A little less than a decade ago EMC was trading at book value and generating huge amounts of free cash flow (FCF) It was the one and only time I bought a disk drive stock. However, EMC has acquired many software companies to improve the dynamics of their business. They were very fortunate in their purchase of VMware which now is talked about more as a value driver than the company itself.

Sometimes it doesn’t work out so well if the acquisition comes at too high a cost (Veritas comes to mind) but that certainly doesn’t preclude the acquisition strategy from starting to improve the dynamics of the business. Of course some companies, like Dupont and 3M, have figured out how to innovate enough around pseudo-commodity markets to enjoy brand-like margins and better growth.

It appears that Micron is headed for a great year ahead with improved demand, stable to improved pricing with limited planned capacity additions. This will allow the company to generate close to $2B of FCF.

But the up cycle has always been followed by the down cycle where capacity comes into the market, usually just when demand is starting to ebb and prices are falling. So most investors discount the down cycle on the way up. (This is the same way the auto companies used to trade. As senior analyst Dave Healy used to say “you buy them when their PE is infinite and sell them when the PE hits 4x.”)

Most of the semiconductor companies we follow have substantial IP and software in thematic areas we invest in like the Cloud, Mobile Internet or RealVR. This year may be the last good chance Micron has to do something very strategic and transition the company to a model that attracts long-term growth investors.

Should they buy a GPU company? That’s an interesting thought.

[Disclosure: I own a bit of Micron here because I think it can move higher given the fundamentals and market conditions, but it's not and will never be a long-term holding unless something changes.]

I avoid talking about every technical burp and tweek we review from the major technology firms including Intel, AMD, Nvidia, and the like. (Same goes with every ebb and flow of performance ratings and twists and turns of patent disputes.)

However the recent release of Nvidia Optimus tecnology is another small reason we prefer Nvidia to companies like Intel and AMD in the computing space.

There are several pages of technical description of Optimus available (this is a good one) but we’ll net it out as an elegant way to offer a computer with the power of a discrete GPU engine that is only used when it is needed, thus saving lots of power and helping to lessen the big tradeoff between speed and power consumption which bedevils mobile computing.

The most familiar analogy is the all-wheel drive in cars. In the old days most all cars were 2WD but for a very few 4WD like the Jeep. The drive train was permanent, there was no switching. Then cars started to come with the ability to lock and unlock the 4WD feature when the car was parked and you had the time and willingness to change the hub settings on the wheels. This got better with a simple lever but in most cases you still had to stop the car.

Now 2WD/4WD systems are automatic and unless you do something to prevent it, the car senses and uses whatever drive parameters are needed to maximize performance. The same is true with hybrids that shift between battery and internal combustion engines.

You get the idea.

Similarly it has been possible to manually turn off a GPU inside a laptop but it’s complicated and requires a reboot – so nobody ever does it.

The Nvidia Optimus technology allows a GPU to turn on only when an application that leverages the power of the extra processors is invoked. At the same time it turns off when it’s not needed. So when you are reading email the GPU is off and the power consumption is minimized. When you are done and fire up a video or graphically intensive game the GPU kicks in and delivers the power needed for a great experience.

This sort of “hybrid computing” has been around for some time but what’s important about this is the implementation. An important difference this time is that incorporating the design doesn’t involve extra effort and costs on the part of the device maker. So this will become a standard feature right away. After all any laptop with a GPU and without Optimus is at a major disadvantage in terms of expected battery life which is a big factor in use.

I don’t want to make too much of it but it’s another good datapoint with respect to Nvidia maintaining the leadership in driving the GPU into the fabric of general purpose computing (which BTW is a certainty in our research view, see our other research notes on it.)

Also refer to an earlier post (Nvidia Turns the Crank) for more links.

[Disclosure: The R2 model portfolio has a long position in NVDA.]

We’ve been on the Nvidia case for some time now. See some of our past research publications to get caught up.

Semiconductor specialists The Linley Group recently posted some details around the performance of the Nvidia Tegra 2 which we will see in numerous devices this year.

(There’s been plenty of coverage of what’s inside the A4 so I’m not sure why they are playing possum on that one. See other sources on the A4.)

There are so many races in the mobile Internet device space (smartphones, netbooks and now tablets) that it will be a free-for-all. Add to it the fact that even the TV in the living room is going Internet this year and the demand for new processor architectures and capabilities will be mushrooming.

These are interesting times not just for Nvidia but also for Intel, AMD, Qualcomm, and ARM. It’s hard to get excited about Intel here given the risks to their growth and margins unless they can change their stripes and embrace the idea there there is more to life than the CPU.

Our positive views on Nvidia are rooted in the fact that computing is shifting from processing words and numbers into not just video but games, rich content and interfaces that behave with physical properties and the deeper content that 3D provides.

It’s also true that consumers are expecting to be able to do many of these fairly complex things at once; all on a hand-held device with hours and hours of battery life that costs around $500.

Architecturally this suggests we move into a hyper-multi-core kind of processing to be able to parallelize the processing to meet the demands all this software has on the hardware.

Performance per watt remains a major issue in the mobile space and the one area where we think Nvidia still has some strides to make. This is an area where ARM shines and they are making some improvements in their graphics processing ability.

Our conclusion is that investors will want to play this disruption in computing architecture and we find Nvidia to be the most attractive in terms of execution, design wins and software momentum.

If Nvidia could understand and really consolidate their position in software the company and the stock would be a huge winner. However based on all our research we don’t quite see that happening. Our IV on NVDA leads us to expect a share price this year of $19-20 this year.

[Disclosure: The R2 Model Portfolio has a long position in the shares of Nvidia and Qualcomm.]

The last couple of months have been marked by a broad set of positive developments for the GPU makers, especially Nvidia and AMD. Some of the highlights have been:

Application acceleration goes mainstream. – The leading creative application providers, Adobe and Autodesk, are embracing the GPU and driving the requirement for one into space of generalized computing. This actually started with prior generations of the software but we’ll see more of this in products like Adobe Creative Suite Version 5 but even Flash will take advantage of the GPU to improve performance and the experience.

Internet video gets serious. – Video is one of the leading new applications for the Internet today and it is shifting from the short grainy YouTube content of yesterday to high definition, in some cases even 3D, content. This level of digital video demands more processing power to produce and even to view properly. Everybody want’s video, more so than even text and browsing, and it’s another good reason to have a GPU in computer, especially mobile Internet devices.

GPU in the cloud. – Until recently it wasn’t clear if GPU computing power would be available in the cloud. Given the success of generic on-demand offerings from Amazon, Google and others it seemed only matter of time before we would begin to see it. Both AMD and Nvidia are working closely with the major players and we will see GPU processors on-demand and in the cloud pervasively in 2010.

Cloud-based GPU applications are shipping. – Mental Images has announced and is providing Reality Server which represents the high end of digital image rendering in the cloud. Some companies are using it today with their own cloud servers. Application platforms like OTOY are enabling the highest end of gaming even on mobile devices like the iPhone using cloud-based GPU software and acceleration. Here is a link to a Techcrunch post on OTOY back in June of 2009. We also covered a demonstration of OTOY in our short research report on the 2009 Gilder Telecosm Conference. It’s available in the sample publications section of our website.

3D content has arrived. – The cinema industry has embraced it. Avatar is in theaters this week. A big difference today is that the cinema industry creates content in native digital form which means that content can be moved rather than redeveloped into other formats for games, short videos, images and other forms of consumer entertainment content.

Standards are emerging. – Although there is still plenty of bickering over PhysX versus OpenCL and DirectX versus others, these technologies are settling into mainstream software like applications, browsers, and operating systems. In cases were two important standards make it, it looks like they will both be supported. This makes it possible to deliver high-end graphics and 3D applications to a large market.

We expanded on the mobile 3D theme further in a report published yesterday by GigaOM called: 3-D Untethered: A Look at Mobile 3-D Technology (GigaOM Subscription).

On top of all the industry adoption Intel settled with AMD and paid them $1.25B, scrapped their Larrabee-based plans to enter the discrete GPU market and is under further FTC investigation for trying to screw Nvidia.

Put simply the industry is shifting to video, 3D, and mobile and right now this leaves Intel mostly out of the action. It’s great news for Nvidia, AMD, ARM, Imagination Technology, Qualcomm and a host of other semiconductor makers.

When it rains, it pours.

[Disclosure: The Research 2.0 model portfolio has positions in both Nvidia and Qualcomm.]

Just as we published a research note highlighting some key takeaways from the recent Gilder Telecosm, we see the news that Intel has suspended their immediate plans to enter the discrete GPU market.  From the day we published our Nvidia note on January 29th “Transition is Opportunity for Nvidia” there as been a measurable increase in the rivalry between Intel and Nvidia over the increasingly-important GPU market.  Since we have been highlighting Nvidia as the leading company we’re pleased to see the news but it’s also just a blip on what is becoming a monster technology growth and investment area.

In fact our note highlights the fact that the RealVR and Cloud Computing themes are already converging.  Taken together this represents probably more than 100% of technology market growth in the next decade (although Digital Power and Biological IT will help too.)  Inside this new mega-theme we include all forms of consumer and enterprise cloud computing and the mobile Internet.

Intel still dominates the integrated graphics chipset market so the news is more interesting for AMD and Nvidia.  AMD now is unique in offering both mainstream x86-based CPU options and their own quite powerful GPU chips as well.  Nvidia leads in the mobile and embedded space by a wide margin and has been racking up design wins with Tegra and the ION platform.  Both AMD and NVDA are working with partners to bring GPU computing into the cloud in a serious way.  We are seeing early applications of this technology already.

Although our RealVR Cloud observation steals the show in our Gilder Telecosm update there are other important implications including: much better prospects for investments in alternative energy, particularly Digital Power, now that the unrealistic expectations have been burned off, and more disruption is in store for the very large and stodgy education market.

[Disclosure: At the time of this writing Research 2.0 holds shares of NVDA in their model portfolio.]

Nvidia stock has been quite a roller coaster this year since we published our original research report on January 29th. At the time we noted that the growth in 1) mobile computing, 2) visualization and 3) higher end processing all fed directly into the growth prospects for Nvidia.

Since then we have seen the company continually expand their market share in these segments though design wins, product launches and new offerings.  As we noted Intel has yet to show up at the party and when they do they will have the wrong product.  AMD/ATI has done well and some niche firms like Imagination Technologies (LSE: IMG) are in a very good position.  However Nvidia remains the company best positioned in these three markets.

Recently the company got closer to Microsoft in several areas including the Zune and linking resources to allow Nvidia processors to accelerate Microsoft products in the same way Nvidia is doing that for other software providers like Apple and Adobe.  During their recent GPU conference they unveiled their next generation GPU which is quite impressive.  However there is too much attention paid to the the high-end today and not enough to the mobile and embedded spaces which is where the real growth opportunity exists.  In a few years people will ask “What’s a video card?”  Don’t be surprised.

Over the course of the year the stock moved up to our initial intrinsic value (IV) estimate of $15 and we published an update in early September which also “rolled forward” our IV to $17 as it is now close to the end of the year.

Recently the stock has been downgraded by JP Morgan who cited risks to long-term estimates from increased competition and potential legal battles with Intel.  On the estimate side current consensus for revenues calls for an increase of 14% YoY to $3.58B. That’s higher than the 9.2% for Intel but more inline with the likes of Qualcomm (13%), Broadcom (16%), Marvell (16%) and OmniVision (15%).  What we conclude from these figures is that Nvidia and also these other companies probably need a reasonable economy next year to exceed their current estimates.  Inventory is still quite low and we get some very easy comps the next two quarters so the risk to estimates will be greater on the back end of the year.

Earnings are a bit harder to figure for next year because there is huge leverage on the gross and operating margin lines.  Small improvements have a fairly large impact on earnings.  Current consensus calls for $0.64 on the out-year which is up 3x over a depressed figure for this year.  In our IV model it doesn’t much matter if NVDA reports 35c or 65c next year but obviously it will impact the stock, at least in the short term.  In our view the more volatility for NVDA the better since by adjusting portfolio weightings one can capture much greater returns than the simple stock move.  The shares are up 71% YTD but the 30% dip in May gave us a chance to go very overweight, further enhancing returns.   With the shares down just over 16% from their recent peak we may not be at a major overweight yet but we are scaling up a bit into weakness.

As we’ve said before the only thing we really don’t like about NVDA is the heavy selling by the CEO and the fact they he has stated that he doesn’t see a big opportunity for Nvidia in the enterprise.  We know he’s wrong on the latter point.  His selling has been regular and plan-based but it’s the type of thing that bothers just a bit.

Our historical published research on Nvidia is freely available on our website after registration is approved.

[Disclosure: Research 2.0 has a net long position in both Nvidia and Imagination Technologies at the time of this writing.]

These are simply notes from the analyst meeting held June 16th at the company HQ.  I listened via webcast.  [Comments in square brackets are thoughts.]  For our published research and models please login to the website and visit the library.

Notes:

The standard computer today is far from sexy.

They industry is at an inflection point that we will remember going through for years to come.

Believes that a new architecture is required and the GPU has an important role to play.  Future systems will include both a sequential processor and a parallel processor co-processing along with it.

In order to meet the processing needs of rich internet applications, a processing architecture like the above is what is needed.

Growth comes in three slices: mobile/embedded (TEGRA), workstations (TESLA) and consumer PC (GEFORCE / ION) and they have TAMs of $7B, $5B and $26B (consumer only) respectively. Today they are said to be $0B, $1B and $4B.

It’s not unnatural to believe that GPU spend should be equal to or greater than CPU spend.  [Interesting point, not the consensus view.]  Given how important visualization is the power focused on that part of the problem should be equal or greater to sequential computation resources.

Suggests that today people are looking at actual performance and not powerpoint slides of what chips will do and that Tegra is doing very very well.

The only way there can be mainstream market shifts in such an established industry area you need giant volume and major changes in overall performance.  [Says that CPU "hit the wall" but I don't think that's true at all.]

Moving into CUDA discussion which enabled them to put GPGPU functionality “on the back of” the standard GPU “workhorse.”  120M units out there that can run CUDA today by downloading and installing software.  But can the speed improvements be delivered?

As a new market and way of doing things it has taken a ton of work to “make this architecture stick” and they think they have achieved it.  [So what about alternative technology providers for the CUDA wave if there is in fact one coming?]

Tesla:CUDA as Quadra:GeForce ?

Power efficiency is an opportunity area where GPGPU computing can be attractive.  Many tasks like image procesing, video transcoding are handled well by the GPU.  General like this functionality is more integrated into the OS and accessible with Snowleopard and Windows 7.

Silly to have a quadcore x86 CPU processing video if you are watching a movie or processing audio if you are listening to music.  The GPU is much better and more efficient at that.

Power management and dissappating power is very expensive versus eliminating it.

Lots of discussion of programmable shading and CG and that it would lead to more general things like CUDA.  HPC and digital film creation are some of the few that don’t want to use Windows or MacOS.  Describes application functionality like automatic image recognition and tagging as some of the “magic” that the GPU architecture will enable.

For games it’s not about how things look but what you can do with the game in terms of experience and more dimensions.  The PhysX engine is key.  Runs on a CPU but runs on a GPU faster.  3D vision is another way to bring more richness to the experience.

The Nvidia approach does result in a higher cost product versus ATI.  Maintains that their gross margin problem has more to do with their $1B in excess inventory rather than structural cost disadvantages.

They are trying to do something dramatic and are expanding the industry.  It means that there can be short-term pain and investments to be made.  CEO “really believes” in what they are doing.  [This part must be scary to investors.]  Leadership of the company is not taking pay.  [Really?]

The market opportunity will roll out as applications become CUDA-enabled.  One should see the emerging companies summit for where Nvidia may invest.  Bought a stake in the company that become Google Earth.  Lots of joint development going on with large companies.  Mindful of negative synergies from acquisitions.  Tegra was built from the ground up around an industry standard processor.  [I wonder if the Intel/Wind acquisition has any impact on Nvidia?]

Tegra will be focused on the mobile/embedded opportunities that demand HD video where there are no other acceptable solutions.  [Have to see about that.]

Claims that they are focused on things which are too hard for others to do, will result in major design wins and generate major increases in TAM.  These are the continual tests that are run against the company business plans.

Mike Rayfield, GM of Tegra – “First HD Mobile Processor”

80% of the top 100 websites have Flash built in. [?]  Hulu visitors average 30 minutes a visit.  Average YouTube watcher spends 28 minutes a day online.  Going HD.  Even FB has lots of images, video and animation.  Video minutes on FB up 13x YoY.

Looking at Tegra complete its like a stick of gum.  8 processors.  2 ARM, GPU, 2D engin, HDV encoder, HDV decoder, audio, image sensor.  Means that ARM processor is running at 5% when doing 720p video.  [Cisco backs up the notion that video content is going to be 2/3 of what we are processing in the future.]

42 design wins so far.  About 18 are smart phones.  “Household names, household carriers.”  Working with 27 different manufacturers right now.  25m unit opportunity in 2010.  First launches are end of 2009.  Working with 27 different wireless carriers.  Many love this little Foxconn notebook.  Transfer price to carriers will be about $200 which is perfect for them.  [Are networks the gating factor here?]

Carriers are excited about this netbook/MID opportunity to drive their business.  100 of them were at Computex where they don’t typically go.  Carriers want to brand the devices.  (Wistron, Inventec, Compal and others.)

Average TV watcher still spends 4 hours/day versus the 30 minutes for YouTube or Hulu.  [This could take a bite out of Windows use at the low end.]  Users typically have lots of tabs open and many will have video running.

Able to show amazing and real video at under 1w. (!)  [Early days but we will have to see what the Qualcomm Snapdragon looks like.]  Working closely with Adobe to be able to accelerate Flash. (Not just Lite but also 10.)

The Mobile TAM is under $4B now but will reach $12B by 2013 (smart phones, portable players, MID, automotive have design wins today and others will join the mix.)

Tegra 650 is the product today.  T2 is 4x and due 1H2010 adn T3 is 10x and due out 1H2011.  Same power envelope (1/2 watt.)  [Can they do it?]  Maintains that Intel is 2 years behind and before they catch up the 4x and 10x products will be out.

“Dehydration of the PC” strategy is a great negative tagline for Intel.

Suggests they can be mid-upper 40′s in GM and “not be a drag” on corporate margins.

Competing versus QCOM which has modem around which they can wrap additional transistors to gain share of the smartphone.  Suggests that pace of change in multimedia and modems are different such that it makes no sense to lock them together.

A slower market does help incumbents which can slow transition to new technologies like Nvidia.  Basically says that how much revenue falls into the current year is hard to say but by Q1 of next year the momentum will be very clear.  Said that the ASP range is $18-30 depending on functionality.

Devices now are dominated by the display which means there is “plenty of room” for chips.  Supports Windows CE, Windows Mobile and Android.  Have designs going in all those.  [What about Palm WebOS, iPhone and Symbian?]

Analysts seem to feel that they company is involved with mostly “non-Tier 1″ partners so would like to see that change.

Talking about $50-100M in revenue for the “back half of the year” and could be into the following year depending on the carriers.  Division has 500 people so you can do the math to figure out what the breakeven is.  [Noting a little testiness in talking about numbers.]

Company is starting a magazine?  What does the mix look like in three years?  1/2 Tegra and the other 1/4 (?) servers and workstations.  GeForce will be the rest.  In 20 years computers will be everywhere, they will be very small and they will all be connected to the web.

Analysts are very nervous over costs at this company.  That’s clear.  IPTV will be a huge driver.  It’s all going 1080p HD.  Not too many computers today can do that, let alone a $300 MID.

On the x86 they want to avoid it like the plague because of power consumption. It’s too much more than ARM.  When you start thinking in terms of billions of devices, 10 watts is too much.

Where are all the software developers going?  It’s not desktop.  It’s mobile.  iPhone, RIM, FLASH, etc.

Went through the gorey details of the 10 point collapse of margins due to inventory and price corrections.  The professional industry remains weak.  Auto industry is suffering and they tend to buy lots of workstations.

Suggesting that they will get into the digital video streaming market?  Needs a 30x price/performance improvement. [I wonder if Akamai is looking at this?]

Refers to an “enormous amount of middleware software” to support these processors.  Investing heavily in tools to help build software for the Nvidia platform and education programs at universities.

Enabling a new architecture is a big deal, lots of cost.  Outcome is uncertain.  Look at Sony with Cell.  That cost a fortune and basically is a failure.  Company has 1000 hardware engineers out of 5600 but lots of software.  The development technology organization is over 200 people strong and around the world.

“ION success would be 2-3x what it is today if not for the Intel FUD tactics.  The lawsuit is about a future product and only confuses the market into thinking it is related to current products.”

The goal is to put a GPU into the computer.  The chipset business is about the glue that makes that possible/easy to do.  It’s all just I/O.

Doesn’t a combined CPU/GPU vision favor the competition?  CEO questions old views of market segmentation around user experience.  [Very interesting point, worth more thought.]

[Are we really talking about old data-intensive versus compute-intensive here?]

Nahalem is a great CPU. Atom is a great CPU.  Very unique versus what Nvidia does.  The complement is what matters.  Making it too similar defeats the purpose.  Larrabee x86 cores don’t make sense in this context.

Claims that there is a 10-15% premium in the marketplace for Nvidia.  Price wars hurt players in the channel if they are violent.

Integrated graphics have been integrated for a long time. It will set it’s own limit on what is possible.  Would never make sense to do gaming or anything intensive on that integrated graphics platform.

Discussion of USB and SATA in chipsets and why anyone would care about where it sits.  Seems to confuse most analysts.   The goal is to have a CPU and GPU in every computer.

Is Nvidia behind on DX11?  Response is nobody has shipped it yet.  Aspires to be Apple in terms of talking about products that are released and available now, not in the future.

Don’t consider corporate an opportunity.  (!)  [They are not getting it on RealVR in the enterprise.]

The real fear finally voiced by analysts is that Intel will kill them.  Because you can see the value that the Nvidia chip brings it makes it impossible for Intel to defeat them by integrating a commodity function like I/O.

Suggests that Intel is basically saying that they will give $30 to you if you use Atom without Nvidia.  But for many markets that still won’t do.  Those are the Nvidia customers.  The cost of an MP3 player is basically zero but people still flock to Apple because for $49 or more it’s great.

When you turn CUDA on in a video editing environment you will be amazed at what is possible.

Drew Henry – GM Desktop GPUs

Discusses the fact that the two main OS vendors are moving to embedded support for the GPU. You can write to OpenCL, DirectX, CUDA or FORTRAN.

ION is a new brand.  It’s aimed at the small, fully-functional part of the market. Specifically designed for this market and $299 price points.  GeForce is aimed at the higher end of the market.  Gaming, creative, workstations, etc.

Running 1080p Blue Ray full speed on an Atom PC as a demo.  To copy to a sony video walkman it must be copied but also converted.  Both the Atom/Ion and Atom only systems are running Windows 7. The video transcoding is built into the OS which is very nice.  The GPU system can do a 2 minute clip in just over a minute the non-GPU system takes 15 minutes.  The real difference is about 5x if you let them run.  So a one hour video converts in 38 mintues on an ION and 3.3 hours on an Atom.

And there are over 100 million GeForce GPU’s out there now that can all use this ability.  Moves into discussion about PhysX.  Integrated into major game engines, is cross platform and licensed by most of the major developers.  [No discussion on Havok.]  See Darkest of Days for examples of the effects.  See also Dark Void, U-Wars, Terminator Salvation as well.   Giving a demo with the GTX 285 (high end stuff.)

758 titles said to be supporting SLI today which will show up when people move to Windows 7.  3D Vision being demoed. Several hundred games can work out of the box in 3D.  Still expensive so it’s not mass market.  Working on a low end 3D glasses approach to help more consumers get the experience.

The GPU is becoming the de facto standard for processing video.  Parners are taking Nvidia technology into this market for editing, enhancement, conversion, upscaling, HD and Blu-ray.

Demonstration of VReveal which was developed by the CIA to clean up video. Now this can be used for that huge inventory of VHS, cellphone video and all that content to be uploaded and used.

Showcasing some devices like the Lenovo S12 notebook.  Turns an Atom into a fully-functional PC.  Sims3 sold 1.4m units in 7 days.  Over 100m units sold to date.  ION makes it playable on a netbook.  [Lots of the same points being made here for 20-30 minutes or so.]

[Should do a blog post on Intel "crimes against humanity."]

Intel and AMD are supporting Havok.  What does that mean?

Claims that PhysX and Havok are totally different animals.  (?)

Basically the fact that Windows 7 and Mac OS XI makes the GPU automatically a full player in the computing environment is the key for the market shift.

Good question on what level to write to in terms of being able to have the OS optimize performance.

Andy Keane – GM Tesla Computing

Cray, Connection Machines, BBN, Maspar, etc.

Innovation in the HPC market is gone.  Mostly x86 now, some GlueGene.

Where is that next factor of 10 or 100?

Want to do supercomputing? Go down to Fry’s, get the $49 card and download the software.

Key industries are Seismic, supercomputing, universities, defense and finance (300m, 200m, 150m, 250m and 230m TAM for each one.)

“World’s Highest Performance 1U server.”  New category.

Two areas of Tesla.  Personal Supercomputer and Tesla co-processing cluster.  300 installations of Tesla clusters.  Can democratize the top end of the supercomputing pyramid.  100′s will spend 10M, 100,000′s will spend $50k-$1M but millions can spend less than $5K for a PSC.

David White, CFO

Reviewed the charts regarding the impact of the inventory correction and the impacts on margin.  Company put out a target model getting back to 13-15% operating margins over time.

Ending Q & A

Working down inventory and of course there is a mix shift but why are wafer starts going up?  Answer is that Q1 was almost none so Q2 has to be up sharply.

How constrained is 40nm?  Believes they have the terms with TSMC to get what they need.

GPU attach rates are going to go up sharply with the new OS releases later this year.  ION is a good entry level system but the discrete chips add much more processing power.

The business works better when channel inventories are lean.  Windows 7 should help drive demand in the second half.  Dell Quicksilver has two discrete GPU untits with SLI and a 9400 on the motherboard. Win7 and Nahalem should be a good combination and a viable new enterprise platform.

Since we published our report on NVDA back on January 29th the shares have vaulted to $12 then sunk back to near $8 and are now sitting in the middle at $10.50.  Our intrinsic value (IV) estimate remains $15 which is a level we think the stock will see this year.  But the story is filled with drama so the levels on the stock are likely to continue to be all over the place.

These two *adjacent* Twitter messages illustrate the situation in a nutshell:

Two adjacent tweets tell the story

Intel has clearly awakened to the threat from the GPU in general and Nvidia in particular.  Larrabee is a very powerful and potentially useful chip but to us it appears to be aimed at the high end of the market which is not where the growth is now.  Over time we expect servers to handle more graphics processing (See our report “Shake Up Time in the Gaming Industry” for more details on that.) but now the trend is towards laptops, netbooks and even smart phones.

Nvidia clearly has been building a lead here. First with the Apple deal and now with a stream of design wins and announcements around their new Tegra and Tesla platforms.  Next week at Computex Taipei many more will be added to the fray.

The overall context here is that visual computing is going mainstream and obviously a GPU is an important part of making that happen.  Arguing the Nvidia versus Intel case is a waste of time if it weren’t for a history of somewhat anti-competitive behavior from Intel.

In short we are fairly certain that Nvidia will come out a winner from this trend.  After all they are the only company 100% focused on this market and it’s finally coming into it’s own.  Yes, we know, margins are a concern.  However we’ve made fairly conservative assumptions in coming up with our IV of $15.  The company also has generated very high returns on invested capital and sits with a large cash reserve.

In addition to the news out of Computex next week the company will be hosting their annual analyst meeting on June 16th.  It’s no wonder that volume on the June options has skyrocketed in recent days. We expect fairly large sums to be won and lost in the next few weeks as investors apply intense pressure to “figure it out.”

[Disclosure: Research 2.0 maintains a variety of positions in NVDA stock and options, both long and short. At the time of this writing they would be described as "net long in aggregate."]

It’s no secret that the GPU space has been heating up.  The Apple/Nvidia deal got the ball rolling and now Intel, Nvidia and AMD/ATI are in a fight to lock up design wins in the next generation (or two) of devices. 

A few things are driving this including:

1. More graphics processing needed in mobile Internet devices.  Video and graphics are more important than crunching spreadsheets.
2. Interfaces are becoming more complex.  It’s been on the roadmap for 20 years or so but more game-like UI features will dominate the client going forward.  Much as basic windowing systems took over back in the late 1980′s and 1990′s. 
3. Software libraries have made it easier to take advantage of the GPU for some more general purpose processing. This is both a top-down and bottom-up movement.  The GPGPU idea is here to stay.

That Intel may be in the PS4 (if there is such a thing) could happen.  The new Intel chip is positioned at the high end but most of the units, and possibly profits will be in the low to mid-range where Nvidia (with Tesla and Tegra) appears to be in a good position.

Nvidia as a company and the NVDA stock are in the midst of a huge transition from high-end, expensive add-in cards to chipsets and mobile solutions.    We expect Nvidia to emerge as a leader in this category. It won’t come without any bumps although guidance already reflects a fairly steep falloff in their traditional business.

Our fairly conservative estimate for fair or "intrinsic value" comes to $15 which makes the stock attractive at these levels.  Full details can be found in our recently published 5 page client report ($pdf) discussing the changing client architecture with implications for Intel, ARM and Nvidia. 

[Disclosure: Research 2.0 has a long position in NVDA and ARM at the time of this writing.]