3 Notable Chip Stocks

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

According to a report by Jon Peddie Research, global sales of computer graphics software and hardware should reach $142 billion by 2016, up 17% from this year. With the revival of the economy and increased consumer spending on graphics software and hardware, I can see very bright future prospects for this part of the semiconductor industry. That’s why I have considered NVIDIA Corporation (NASDAQ: NVDA), and some of its peers such as Advanced Micro Devices (NYSE: AMD) and Qualcomm (NASDAQ: QCOM), for a closer look.

NVIDIA

NVIDIA is a leader in the graphics processor market. It has two reportable segments: the GPU segment and the Tegra Processor business segment. NVIDIA GPUs are primarily sold in the PC market, and the PC market is under intense pressure. But despite the pressure, we have seen healthy sales volume for the core i5 and i7 chips, which leads me to believe that the decline of the PC market is happening in the low end Pentium segment of the market, which NVIDIA does not target. The high end of the PC market is doing well, which bodes well for the company.

NVIDIA has recently announced that NVIDIA Tesla GPU accelerators are powering the world's two most energy-efficient super computers, based on the latest Green 500 list. NVIDIA has recently made another development in its GPU business segment by launching the new NVIDIA GeForce GTX 760 GPU, which offers amazing PC gaming performance, delivers extreme frame rates for this year's hottest PC games, and is selling for $249. NVIDIA recently launched its Tegra 4 processor for smartphones and tablets, but it is not expected to perform as well as competitor Qualcomm's Snapdragon 800 processor due to some design issues. Despite the failure of the Tegra 4, NVIDIA has better future prospects because it recently has made many developments in its core operating business segment GPU, which would strengthen NVIDIA's position in the market. Another step taken by NVIDIA to enhance its profitability is licensing its GPU and visual computing patents directly to smartphone and tablet manufacturers.

Peers

Advanced Micro Devices, another major player in the chip-making industry, designs and manufactures graphics cards and microprocessors for personal computers, tablets, gaming consoles, embedded devices and cloud servers. The company has started volume shipments for its next generation APU, code named KABINI, designed for ultra thin notebooks and small form-factor machines in the entry and mainstream segments. With respect to the graphics segment, the company has announced RADEON HD 8000M series GPUs. These new developments would lead to better future performance of the company. All major next-generation consoles -- Sony PlayStation 4, Nintendo Wii U, and Microsoft Xbox One -- are powered by Advanced Micro Devices. Pre-orders for the PlayStation 4 and Xbox One are at record levels, and this is great news for the company that makes the chips in every single console.

Qualcomm is the absolute market leader in manufacturing LTE chips for smartphones, having 86% of the market share of LTE chips. Qualcomm is heavily entrenched in Samsung's flagship phones. Recently Samsung announced that its Galaxy S4 has sold 20 million units; this bodes well for Qualcomm because it has supplied chips for the Galaxy S4, and this would positively affect future quarters' results. Another major development is that it has joined hands with Samsung for the sale of its WiFi networking chips in the recently-introduced Galaxy S4 Mini version of the Galaxy S4. Qualcomm, the biggest chip maker for mobile phones, has decided to enter into the tablet market as well, with an upgraded version of its Snapdragon processor in Google's second-generation Nexus 7 tablet, to be released at the end of the month. Qualcomm has also planned to incorporate this upgraded version of its Snapdragon processor in 200 smartphones this year. With all these developments, I see bright future prospects for Qualcomm.

Outlook

As mentioned above, with the revival of the economy, consumer spending on graphics components will increase, and this presents a huge investment opportunity. The three stocks that I have considered all have huge growth potential and a positive future outlook.

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Hussain Asghar 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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