How Weak Is This Semiconductor Company?

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

Graphical-chip processor NVIDIA (NASDAQ: NVDA) recently reported its first- quarter earnings, with revenue beating analysts' estimates. The company was able to avoid a down surge in sales despite a fall in PC shipments. This was a result of high-end consumers in the market for computers being more willing to spend for NVIDIA's new processors in exchange for better graphics.

Good numbers

NVIDIA's revenue rose 3% to $955 million compared to the same period last year. Results were slightly better than the Street's expectations. As the demand for higher-end systems remained strong, the company's GPU revenue improved 8% compared to last year. Net income rose to $77.9 million from $60.4 million in the year-ago period. Revenue in NVIDIA's ARM-based Tegra line of systems on chip (SOC) segment declined more than 50% sequentially and 22% from the year-ago period.

Is it a far-sighted view?

NVIDIA's GTX line of graphic-card sales is going strong and the company is trying to expand operations in the division. NVIDIA has performed well despite the decline in PC sales in the first quarter of 2013, but the long-term trends do not look favorable as PC demand seems to grow weaker with time.

Intel (NASDAQ: INTC) and Advanced Micro Devices (NYSE: AMD) seem to be working toward outsmarting NVIDIA. They are making Intel's processors into SOCs by incorporating on-chip GPUs. This should possibly reduce the market for discrete GPUs thus resulting in NVIDIA losing sales. The built-in GPU's were traditionally found in mobile-PC applications, such as ultra-books, but they are making their way into desktops, too.

AMD, from its Radeon line of graphic cards, has incorporated GPUs that are compatible with Intel's CPUs, which it calls accelerated-processing units (APUs). These APUs have graphics which are equal in capability to mid-grade discrete GPUs, and are far more efficient than Intel Ivy Bridge processors. They thus provide more juice at a lower price. AMD's high on performance, and economical APUs have been adopted by Sony and Microsoft for their next-generation gaming consoles.

The single-silicon SOC, which started with mobile computing, is clearly dominating all sorts of computing devices, including desktops, thus, not leaving much scope for the discrete GPU. I believe, NVIDIA should license its GPU designs similar to Imagination Technologies like its IP patented to Intel in exchange for a royalty payment. NVIDIA should look for other ways to derive benefits from its expertise in the discrete GPU business to improve profitability and cushion itself from unfavorable market trends.

Tegra looks weak at the moment

Tegra 4 is the faster and more powerful version of Tegra 3 processors but it has not yet entered production. This has left the company with nothing but the year-and-a-half-old Tegra 3 to offer, which in the mobile-computing world is long enough to become outdated.

NVIDIA's management said that it has deliberately delayed the launch of Tegra 4 processors as the similar Tegra 4i processors look more attractive. The Tegra 4i CPU core design is more like the Tegra 3, but it is a 4G LTE modem-compatible SOC, making it an attractive bid for high-end Android phones.

Currently, most of the products that use the Tegra 3 have been superseded by newer devices, affecting the company's top line greatly. Further, both the Tegra 4 and 4i have not yet reached the market, leaving a low scope to derive benefits. This suggests that the company is facing some internal difficulties to move ahead with its production.

Winning deal: Intel 

With Intel's upcoming "Silvermont" microprocessor architecture, it is targeting phones, tablets, micro-servers, networking, and in-vehicle infotainment. The real catch here is speed and amazingly low power consumption.

Intel's dual core Silvermont-based chips apparently have the same performance as competitors’ quad-core processors in smartphone power envelopes (1W), and the chips use an average of 2.4 times less power. This means that at the same power, two Silvermont cores should deliver 1.6 times more speed than that of competitors’ offerings. This reflects immense potential and is not something that can be understated. 

In tablets, Intel's quad-core processors will either deliver twice the performance at the same level of power or consume 4.3 times less power in delivering the same performance. Either ways, it’s a win-win situation. The company might have been late to enter the mobile and smartphone market but, if its current series of microprocessors are successful, it will be in the leaders position. 

Good products, but is it a buy?

AMD’s PC sales have also taken a hit, forcing the company to restructure. Its custom processors are proving to be winning designs. The company has managed to succeed in getting Sony to its kitty for its next-generation PS 4 gaming console from NVIDIA. It is also extremely near to grab Microsoft's new Xbox 720 processor, too. This should definitely give the company a cushion to survive the fast changing industry even though its position in the PC market remains unstable.

Further, AMD tries to benefit from the shifting needs of its clients towards custom- built processors. Most of its consumers lack the expertise to design and make processors, which should benefit AMD with its CPU and GPU capabilities. A lot depends on how the company’s embedded processor segment performs as AMD expects 20% of its revenue this year from that segment. It has also got an excellent integrated graphics processing product for the medical industry.

AMD definitely has the products but it is losing cash and has a weak balance sheet that makes me apprehensive about putting my money in this company. Further, its stock price has surged 70% in the last one month so I do not expect it to rise much further.

Final words

The market might seem to be a little cruel with NVIDIA as its major future revenue- generating venture of Tegra 4 and 4i has not yet started commercial production. The tech industry reinvents itself every day and technology becomes obsolete in the wink of an eye.

Signs of a tech company stagnating in this lightning paced industry can spell doom as stagnation symbolizes a lack of innovation. It may be too early to say that NVIDIA is weakening, but it surely needs to go over its plans swiftly and return with more of an impact to gain its lost foothold.

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tarun bachhawat has no position in any stocks mentioned. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel. 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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