Can Shield Win the Game for NVIDIA?

Dhara is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nvidia (NASDAQ: NVDA) has pioneered the art and science of visual computing. The company's technologies are transforming a world of displays into a world of interactive discovery - for everyone from gamers to scientists, and consumers to enterprise customers. But has the delay in its latest gaming device release worked for or against the company's new venture plan? Let's take a look.

The plan

NVIDIA, a graphics-chip specialist, announced its plan of launching a new portable gaming device called Project Shield at the Consumer Electronics Show held in January.

The unique selling point of Shield was that it used NVIDIA’s latest chips and also had a built-in display to play advanced games while on the go. This way it had an upper hand compared to Ouya and GameStick because these worked only when plugged into a separate display. It also attempts to be a competition to many video game consoles and brands like Sony (NYSE: SNE) and Nintendo  (NASDAQOTH: NTDOY.PK), which are pioneers in this field.

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SNE Net Income Quarterly data by YCharts

The failure

The plan did not seem to execute as expected. Just some days before the release of Shield its price was cut down from $349 to $299. Neither Sony nor Nintendo is new to cutting down prices, but it was not hard to gauge that low market demand made the company take such a step just some days before the release.

Only if this was not enough, there came another announcement which made the investors give a second thought about the position of the company. The so-awaited gaming gadget’s launch was postponed and this announcement was made just one day before the device was to be launched. NVIDIA said that a mechanical issue needs to be resolved and hence the delay. This will make merchants cautious about investing into a device where a mechanical defect came into picture just one day before the actual release date.

By the numbers

NVDIA earned $77.9 million per share on sales of $954.7 million last quarter. Analysts had expected revenue of $940.6 million.

For more than two years now, NVIDIA’s stock price has been lying between $10 to $20. Shield could have been able to raise the stock price, but the unexpected price cut and the even more unexpected delay in its launch have raised questions. For sure its competitors, Sony and Nintendo should be happy.

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NVDA data by YCharts showing NVDA's last two years price range.

The silver lining

Every cloud has a silver lining and so does NVIDIA. After all, we know gaming devices is not NVIDIA’s major revenue sector. Shield is just a try to take that one extra step. The company is greatly relying on its Tegra and Icera mobile chips and its GRID cloud-based graphics cards.

The three main long term growth drivers for NVIDIA are mobile processors, cloud based GPUs and professional GPUs. With the Tegra line of mobile processors and Icera modems, NVIDIA plans to power smartphones and tablets. GRID, a product implementing cloud-based GPU, has started bringing in revenue. Also professional GPUs i.e. the Quadro line of workstation graphics cards and the Tesla line of high-performance computing GPUs have been a large area of revenue for the company and should continue to be the backbone for NVIDIA.

Pioneers in the game market

Nintendo started the trend of casual market with its Wii game console. The console’s motion-sensing controller gave a new dimension to the gaming experience. With its penetrating price policy, Nintendo’s sales increased from $500 million in 2003 to $1.8 billion in 2008. But since then, the sales have fallen every year. The company seems to have lost its hold in the game market. Therefore, investors should avoid Nintendo.

Where launching new devices or versions have not been of much help to either NVIDIA or Nintendo, Sony’s Playstation4 has brought good business for the company. The gadget is expected to be launched in the market soon at an approximate price of $399. Shares of Sony have delivered a 90% return so far in 2013 as anticipation builds for the PlayStation 4. For sure, Sony is a good investment.

A word of caution

If the company focuses on the upcoming Tegra 4i chip and its GRID cloud based graphics card, these can act as a good driving force. These are the main growth drivers and can help the company sail well since Shield is just a sideshow. Nevertheless, investors should be cautious when it comes to putting in your money expecting some good returns. I would rather suggest that investors should wait for the company’s margins in its next quarterly report, before investing in NVIDIA’s shares at the moment.

Dhara Thakkar has no position in any stocks mentioned. The Motley Fool recommends Nintendo and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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