NVIDIA Needs to Show Some More of Tegra
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Twice this year I have dared to make negative calls on NVIDIA (NASDAQ: NVDA), and both times I have been at the receiving end from NVIDIA bulls. But the stock’s performance so far this year has been nothing to write home about as compared to many others who are riding the smartphone revolution, and I take that as vindication for my bearishness.
2012 started on a bad note for the chipmaker when it had to withdraw its full year guidance. But the first quarter showed signs that NVIDIA might be ready to rumble with its Tegra line of processors. In the just-reported second quarter, NVIDIA finally came good, beat estimates, and sounded out an outlook which put the likes of Intel to shame.
But NVIDIA’s stock price refused to join the party, and it finished the day after reporting earnings on a negative note. I have seen stocks of many chipmakers record tremendous gains in similar circumstances but NVIDIA didn’t budge.
Going by the outlook that NVIDIA has provided, I’m highly tempted to flip the stock to an Outperform CAPS call from Underperform. But if I look beyond a couple of quarters from now on, the Tegra story, around which the company is weaving its future, still appears blurred. NVIDIA has a lot of work to do and tide over various headwinds if it has to live up to its name and break out of its doggedness.
I will go point-by-point in countering Tegra’s prospective drivers, and give you reasons why the stock still doesn’t look like a convincing investment.
The Surface and the Nexus 7: Not Enough
NVIDIA’s Vice-President of Investor Relations, Rob Csongor, said that the quad-core Tegra 3 is popping up in “some of the world’s most exciting mobile devices.“ The names he took after that – the Google (NASDAQ: GOOG) Nexus 7, the Microsoft (NASDAQ: MSFT) Surface and a quad-core, LTE powered, smartphone by Fujitsu that’s selling in Japan. If I have to call some mobile devices exciting, it would be the iPhone and the iPad from Apple (NASDAQ: AAPL) and Samsung’s high-end smartphones.
The Nexus 7 has opened to terrific reviews, and has been doing so well that Google has had trouble keeping up with demand. But the Nexus is no iPad or a Samsung tablet and I don’t expect it to propel NVIDIA’s top line through the sky. Again, if we are talking of a 7-inch tablet, the discussion would remain incomplete without a mention of the next generation Kindle Fire from Amazon (NASDAQ: AMZN), which is rumored to be powered by the Tegra.
The Nexus 7 has been primarily aimed at the spot after the iPad, which Kindle Fire successfully held last year. With a refreshed version on the way, Nexus 7 will again have some serious competition to contend with. Although NVIDIA would be happy to see its chips inside both the #2 tablet contenders, competition among the two might also have a negative effect on one of them.
Also, I can’t finish talking about 7-inch tablets without making a reference to the purported iPad mini from Apple. If Cupertino does decide to come to the 7-inch tablet party, and there’s a good chance of that, the Nexus 7’s and the Kindle Fire’s prospects will certainly be dented big time. And again, as I said, NVIDIA is competing through tablets belonging to the second rung of the ladder so far, way behind what Apple and Samsung sell.
And finally, how successful the Surface from Microsoft will turn out to be is a big doubt. To me, it seems an experimental product at best which is trying to strike a fine balance between a computer and a tablet. Consumer acceptance of the Surface will play a major role in driving NVIDIA but what price consumers would like to pay for Microsoft’s latest adventure remains to be seen.
Where are the smartphones
What I’m going to write here would seem like an extended story of the previous part. “Illustrious” smartphones powered by NVIDIA are the HTC One X and the Fujitsu phone mentioned earlier. If these are flagships on which the company is looking to ride the mobile boom, chances of success would take a solid beating. A Samsung Galaxy design win would have given me some solace as NVIDIA is far away from an iPhone slot since Apple uses its own chips. But Samsung, which used to be NVIDIA’s customer, has also gone in-house with its Exynos processor.
With both the smartphone and tablet bellwethers looking away from NVIDIA, I don’t see much space for the company to flex its muscles in the mobile revolution as of now.
The takeaway
Of course, the company did provide an upbeat outlook and said Kepler GPU’s are finding good traction in notebooks and are slated to be introduced into the gaming market. On the other hand, the Professional Solutions business is being beaten down by economic constraints and the Consumer Products segment has jumped an impressive 36%, driven by the Tegra. But, as I said, we need to look beyond as NVIDIA is pinning a lot of hope on mobile devices powered by the Tegra processor.
NVIDIA has been beating up a lot of noise around the Tegra, and filling up tablets and smartphones that aren’t bestsellers. I have said before, and I continue to say it now, a really big design win would do wonders for NVIDIA’s business and the stock as well. Till then, NVIDIA is a stock to be looked at from a distance.
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