NVDA’s transit from Tegra 3 to Tegra 4

Priyanka 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) leads the market in digital media processor technology, which enhances the interactive experience. The company also performs research and development and marketing of graphics processing units, core logic chip sets and media processors for a wide variety of visual computing platforms. These include enterprise PCs, consumer PCs, professional workstations, notebook PCs, mobile phones, etc.

Although Nvidia delivered expected FY13 results, the combination of seasonality, product transitions and rising operational expenses created a doubt about growth and profitability entering FY14. In my view, Nvidia’s ability to grow revenue at the same pace remains questionable, especially for EPS.

Even though Nvidia's performance on a yearly basis is slightly higher than I expected, there was a decrease of 8% in quarterly performance, which was due to weaker Tegra sales (even though there was a transition from Tegra 3 to Tegra 4) and a drop in desktop GPU sales. Additionally, increases in operating expenses have outnumbered the revenue. This trend isn't expected to reverse in near future.

In comparison to competitors QCOM (NASDAQ: QCOM) and AMD (NYSE: AMD) Nvidia's performance is not up to the mark. Its lack of smartphone penetration isn't going to pick up in the coming future as Tegra 4 faces intense competition, and vertical integration by OEM handsets will further worsen the situation. Hence, future revenue, which is primarily based on Tegra, may not increase as expected. High dependence on HTC, which itself is losing market share, adds additional negativity to Nvidia's performance.

Recently, Nvidia's loss of the Google nexus platform to QCOM, plus poor performance of Microsoft Surface tablet sales, makes Nvidia a less lucrative stock. I expect that economic scenario will further worsen, making competition more aggressive. If the economic scenario deteriorates, this will further reduce consumer demand for PCs. The PC market generates about 80% of Nvidia’s revenue. This high dependence on a particular segment, i.e. PC sales, will make Nvidia a highly volatile stock.

Under such economic scenario, the fight to secure orders will be more intense and customers will ask for price concessions. In addition, given AMD and QCOM’s competitive offering, from a performance perspective and cost of sales, I believe competitors like AMD and QCOM could decide to further sacrifice gross margin to secure market share. This would force Nvidia to lower prices in an effort to protect its competitive advantage.

Along with the already existing rivals, new rivals like Intel are also a cause for concern for Nvidia. The company is attempting to diversify its business, which is one of the primary reasons for the increase in operating expenses. Nvidia is also entering into new markets, which include smartphones and tablets, where the company could face competition from several non-traditional competitors. This puts a question mark on future performance. Its emphasis to penetrate the mobile segment represents a departure from core competency, which doesn't suggest a bear result in the short run.

Increasing macro-economic distress and intense competition are two important factors that will stress Nvidia's financial performance. Nvidia's dependence on one particular product segment, combined with an inability to penetrate new segments, makes the company more vulnerable to competitors. In times of a distressed economic scenario, when consumer demand for PCs is likely to be soft, it's unlikely that Nvidia's revenue will increase. Hence, I believe that this stock's performance won't be as spectacular as it has been in the recent past.

Priyanka Gupta has no position in any stocks mentioned. The Motley Fool recommends NVIDIA. The Motley Fool owns shares of Qualcomm. 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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