NVIDIA Hopes for Tegra
NVDA

November 29, 2010

Graphics chip maker NVIDIA (NVDA) has had its ups and downs these past few years, and not just because of the recession. Increased competition from AMD in the discrete graphics card market has hurt. So has the accelerating loss of its "chip set" (chips for integrating a cpu to other components) business. At the very high end NVIDIA is getting traction for its Tesla computational chips, but those revenues are not likely to make up for other losses. It is possible NVIDIA will do better in its competition with AMD in 2011, but it is telling financial analysts that Tegra chips for mobile devices are its next big thing.

At its November 11, 2010 analyst conference call and report on its third quarter (Q3, ending October 31, 2010), Tegra was touted as a replacement for lost chip set revenue and more. Note revenue were down 7% y/y to $843.9 million in a period when most semiconductor companies ramped revenues by double digits.

Note also that Tegra has been around for a number of years. What we have been promised in 2010 is a new, improved Tegra, with an improved software stack make the new devices using it something device makers feel can compete with the iPad. This has resulted in a least a half-year delay in releasing product; the products are largely a 2011 story. Management believes that touch-based systems are going to wipe out older systems, and that Tegra will make NVIDIA a serious player in the field.

Maybe, but I am not the only analyst who is a bit skeptical, and with good reason. Tegra 2 might be improved enough to be a revolutionary epicenter in 2011, but it might get lost in the forest of competing platforms. Essentially Tegra combines an ARM CPU with a GeForce GPU, in much the same way that AMD's Fusion chips combine an 8086-based CPU with a Radeon GPU. ARM is a low-power architecture that is being widely used to address the mobile device market.

The problem for NVIDIA is that lots of companies are selling ARM-based processors for mobile devices. Apple designed its own. NVIDIA's advantage would be its graphics technology, but it is not yet clear how much of an advantage they really have. Many companies are using graphics chips, or integrating graphics architecture onto a chip, that was designed, like ARM, to be low-power from the ground up.

The history of Tegra is not one of blazing success. Microsoft Zune and KIN were flops. Maybe the 2011 devices will be better than Apple, but will they sell? They won't be competing with just iPads and iPhones, but with a wide variety of devices. Note too that some of NVIDIA's competitors have huge advantages in the mobile market derived by expertise in areas like Wi-Fi and cell phone modem chips.

For device makers there are a number of competing strategies to choose from. Do you want to start with the best graphics, or perhaps the best cell phone 4G technology? Or if devices become largely indistinguishable, maybe the low price supplier is the key to success.

I have owned NVIDIA stock in the past, but right now I think there are better bargains to be had. If Tegra ramps as rapidly as management would like, then sure, today's stock price looks nice. But I believe this is a wait and see situation. The new Tegra devices may come on the market as early as Q1 2011, but I want to see how they sell through. One popular device could make Tegra viable again, but only Apple seems to be able to guarantee the popularity of its own devices. Once you step outside of Apple, what I mostly see is ruinous competition.

See also:

My NVIDIA analyst call summary for Q3 2010
www.nvidia.com

William P. Meyers

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Copyright 2010 William P. Meyers