NVIDIA’s licensing business
We’ve seen that NVIDIA’s (NVDA) technological innovations will have a positive impact on the company’s fiscal 2017 earnings. Its gaming, professional visualization, data center, and automotive segments will likely report growth.
However, uncertainty looms for the IP (intellectual property) segment, as the royalty payments it receives from Intel (INTC) under a five-year licensing agreement will come to an end in March 2017.
The IP and OEM (other equipment manufacturer) segment accounted for 16% of NVIDIA’s overall revenue in fiscal 2016. If the company fails to renew the licensing deal with Intel or isn’t able to secure another such contract, the licensing segment may cease to exist.
Probability of renewing a licensing deal with Intel
Recently, there was an unconfirmed rumor in Bloomberg that Intel is in talks with Advanced Micro Devices (AMD) about a licensing deal similar to the one it has with NVIDIA. Moreover, in the past five years, there have been no Intel products integrated with NVIDIA GPUs (graphics processing units). The license was a settlement for a patent lawsuit NVIDIA filed against Intel.
All the above information indicates that Intel may not be keen on renewing its license with NVIDIA.
Probability of securing new licensing deals
As the Intel deal nears its end, NVIDIA has filed a patent lawsuit against Samsung (SSNLF) over GPU technology. The ruling of the case is due in April 2016. In the event that the ruling is in favor of NVIDIA, the company will succeed in winning a licensing deal with Samsung.
Many analysts are pessimistic about NVIDIA’s licensing business. They are of the opinion that the company’s licensing segment’s revenue will collapse if the Samsung deal does not go through. However, if NVIDIA opens its recent GPU technology innovations to licensing, there’s a possibility that it may attract companies.
In the next part of the series, we’ll look at the probable risks the company could face in fiscal 2017. The PowerShares QQQ Trust, Series 1 ETF (QQQ) has 7.8% of its holdings invested in semiconductor stocks. It has 0.36% exposure to NVDA and 2.9% exposure to INTC.