NVIDIA's (NVDA) GPU Suit vs Samsung, Qualcomm (QCOM) is 'Extremely Significant' - Needham & Company

Needham & Company affirms NVIDIA (Nasdaq: NVDA) at Buy with a price target of $23 following news that the company filed a lawsuit against Samsung and Qualcomm (Nasdaq: QCOM) over GPU patents.

Analyst Rajvindra Gill commented, We believe this development is extremely significant both due to the possible value of the expansive list of devices, and because it could signal the beginning of a new aggressive licensing strategy for NVIDIA.

Gill noted the following key points:

• First Step in a New Strategy? Management called the announcement an "important new chapter for IP licensing." NVDA has been receiving $66M/Q in royalty revenue from Intel, but this meaningful contributor to EPS is set to expire in March 2017. Mgmt has stated they intend to aggressively defend their patents, and we believe this large lawsuit could be the first of several. NVDA noted they have been having similar discussions with other companies as well;

• Tegra's Mobile Focus Matches Licensing Strategy. Similar to ARM's process, NVDA has said they see their future architectures being open to licensees at the time they are announced, with customers being able to choose whether or not to wait for potential revisions, or to license products as designed. We believe this business model is particularly compelling for Tegra due to the more embedded nature of mobile GPUs. We do not believe it's a coincidence that this lawsuit involves mobile devices as it is in line with their previously discussed push to license mobile GPUs;

• Discussions had been going on for years. Discussions with Samsung had been going on for years but little progress had been made. NVDA stated it made every effort to negotiate an amicable outcome, but given the significant nature of the discussions it was an uphill battle. Qualcomm was also named in the lawsuit because the GPUs are included in their chips. The Galaxy Note Edge, Note 4, Note 3, S4, Tab S, Note Pro and Tab 2 were all identified in the complaint, making the lawsuit an extremely significant development for all parties involved;

• Trial Timing. A decision will be made by the courts in the next 30 days as to whether or not an investigation will be opened. A trial would likely be scheduled for 2-3 years from now; and

• Intel royalty represents roughly $0.40 of after-tax EPS. We calculate the INTC royalty revenue stream accounts for about $0.40 EPS while the core business generates $1+ of Non-GAAP EPS.

For an analyst ratings summary and ratings history on NVIDIA click here. For more ratings news on NVIDIA click here.

NVIDIA closed at $20.03 yesterday.

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