Project Shield a Game Changer for Nvidia?
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Nvidia ), a prominent graphic chip and component supplier, made a major announcement at CES, which is being held in Las Vegas. The company debuted its new handheld gaming device, Project Shield. While the device boasts of impressive specs, the announcement also marked a change of course for the company. With this new device, Nvidia would be competing directly with the likes of Nintendo (NASDAQOTH:NTDOY). The graphic chip company had been supplying components to game console manufacturers for a long time so it has the expertise in the area, but on the financial front, it is going to take a radically different approach.
Nvidia clarified on its company blog that it would not be selling the console as a loss leader, which is a common practice in the gaming industry. Most of the gaming device manufacturers sell their contraptions at a loss while deriving most of their profits from the games. Nvidia, on the other hand, will be selling the device on a standalone basis. This means that the device is likely to come with a rather exorbitant sticker price compared to most of its competitors. Nvidia has yet to divulge the price of the console, but it is expected to be priced closer to a tablet than to a regular handheld gaming device.
At this point, it is difficult to quantify the impact of the new device on the company’s bottom line, since the pricing has not been revealed. However, given the advent of faster and powerful smartphones and tablets, the decision to launch a dedicated gaming device is questionable. Established device brands like Nintendo are struggling to post impressive sales figures for their consoles like Wii U, which sold 425,000 units in the first month of its launch. The sales numbers did not match street expectations. Similarly, Sony faced an uphill task with its PS Vita, which was launched in February last year. The device failed to lure customers, partly due to expensive add-ons required. Nvidia's console also falls in the same trap as it requires specialized graphics cards. Further, the console itself is expected to be priced higher than most of its peers.
Apart from the competition posed by its more established contenders, Nvidia’s biggest challenge comes from the changing landscape of video gaming. Barring die-hard gaming geeks, most recreational players are now content playing games on their smartphones and tablets, resulting in lower demand for dedicated device. Nvidia is keeping its cards close to the chest and yet has to reveal the launch date or the price for the console. However, it is rumored that Shield will hit the market in Q2 of this year. Since Nvidia has made it clear that it would not be pricing the console conservatively, it can be assumed that the company is looking to emulate Apple, that is instead of racking up sales volume, it will be more interested in creating a niche market with high margins. However, given the market conditions being faced by more established players like Nintendo and Sony, Nvidia is going to have a tough time pulling this feat.
Nvidia has been facing tough competition and hence looking for diversification. In 2012, the stock lost about 10 percent of its value. Along with Shield, the company also introduced Tegra 4 at CES, dubbing it as the fastest mobile processor in the world. With Tegra 4, Nvidia is finally shoulder to shoulder with Qualcomm ), which already has a 4G enabled processor in the market. While Qualcomm has lead in the smartphone segment, Nvidia chips are the chosen ones for tablets. Since the tablet market is largely dominated by Apple iPad, which uses A-series processors, Nvidia’s success will largely depend on tablet makers’ ability to capture a larger share of the market.
Despite negative stock price growth in 2012, Nvidia still remains one of the robust stocks in its category. Nvidia stock also offers 2%+ dividend yield, making it even more palatable. Its balance sheet also shows healthy liquidity. The company seems to be losing its edge in the PC market, and it derives a major portion of its revenue from this segment. However, as the PC segment itself is in a declining phase, Nvidia will do itself a favor by focusing on development of mobile chips. The stock seems a good buy for the long term, but the company’s latest strategy to diversify itself by launching a handheld device seems to be dubious at best.
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