Don't Go Shopping NVIDIA Just Yet
Harsh 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) finally offered hope in the first quarter of this fiscal year after a devastating end to the last one. The maker of GPUs and mobile computing chips showed signs that it is finally coming around. Its Tegra 3 processor found its way inside HTC’s flagship Android phones and NVIDIA also hopes to see some major gains after Microsoft (NASDAQ: MSFT) launches Windows 8 based devices later this year. The Street applauded the results and the guidance, sending NVIDIA’s shares shooting north and easing some of the pain that it has caused investors so far this year.
But I believe one shouldn’t get too much optimistic about NVIDIA just as yet. The company is still contending with a decline in its traditional business of selling GPUs but is seeing traction in its mobile chips business. It will still take time (not sure how long) for NVIDIA to reclaim its earlier glory but the road ahead is full of a number of obstacles, making it pretty difficult for the company to deliver strong results continually. Let’s take a look at them.
Still waiting on GPUs
The GPU business raked in revenue of $580 million in the quarter, dropping 9% from last year and roughly 7% sequentially. The aftershocks of the Thailand floods last year, which caused supply chain disruption in the industry, are still being felt and the trend might continue as normalcy in the industry is still a couple of years away. Moreover, supply shortage of 28-nanometer chips at Taiwan Semiconductor, NVIDIA’s manufacturing ally, also dragged down the top line. NVIDIA doesn’t expect this part to be fixed till late into the year.
However, it’s the Kepler architecture grabbing the headlines in the GPU business. The company has already launched 3 versions of this product, the latest one being last week. The earlier 2 opened to rave reviews according to the company and as such NVIDIA is pinning a lot of hope on this design. In addition, NVIDIA is partnering with ARM Holdings for riding on Windows 8 but Intel (NASDAQ: INTC) is going to present stiff competition.
And there’s the fight between discrete graphic chips and integrated ones. If you are a gamer, probably you have a dedicated machine for that with a discrete GPU, and that chip could be either a NVIDIA or an AMD. But if playing high-end games isn’t your priority on your notebook, the integrated Intel GPU would be good enough for you. In that way, the consumer will eliminate some of the extra cost he would have paid for a discrete GPU.
Thus, the new Kepler design will probably sell more in PCs and not so much in Ultrabooks as consumers might not be buying them for playing games (as you might buy a better PC for that price), taking away some of NVIDIA’s rosy prospects. So how this plays out remains to be seen and we would have to wait it out until the next holiday season when Windows 8 based devices start flooding stores.
And as far as the desktop PCs are concerned, they are a dying breed. Hence the acceptability of ARM-based devices and attach rate of GPUs on Ultrabooks will play a major role in defining this segment.
What’s next for mobile computing?
The consumer-products segment, which houses the Tegra line of mobile processors, grew 8% from last year. However, the growth was more pronounced on a sequential quarter basis with revenue jumping 21%. The majority of the growth was driven by the ramp up of Tegra 3 processor, which was introduced for the first time on a smartphone by HTC. Management also spoke of some design wins at other smartphone makers but none of them are heavyweight players. Moreover, NVIDIA isn’t in the books of smartphone bellwethers Apple (NASDAQ: AAPL) and Samsung. Samsung used to be a major customer but has gone in-house and is now providing NVIDIA competition through its own processors. So I won’t be expecting too much from the Tegra until and unless it scripts a big, big design win.
NVIDIA is also expecting a lot from Windows 8 tablets. Management tells us that research firm Forrester expects that 375 million tablets will be shipped in 2016. But out of this 375 million, I believe most of the market will be cornered by Apple’s iPad or Amazon’s Kindle Fire. It is expected that the iPad would have half of the market 3 years down the line so I don’t see much reason for NVIDIA to jump on these prospects. Also, the growth in tablets poses a major challenge to traditional PCs so it’s again a case of double whammy for NVIDIA.
The bottom line
As I said, the company has to overcome some serious challenges to reclaim its glory days. The stock has been a dog so far this year. Much depends on how it rides the Windows 8 revolution and also whether it grabs a more substantial pie of the smartphone market. Thus, it’s a wait and watch case for NVIDIA for now.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Intel, Microsoft, 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.If you have questions about this post or the Fool’s blog network, click here for information.