A Few Reasons Why You Shouldn’t Buy This Stock Yet

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I have been an NVIDIA (NASDAQ: NVDA) bear so far this year, but I have been hard pressed to change that view twice in the last three months. The company has reported two solid quarters on the trot, and its Tegra 3 chip is gaining good traction. It even initiated a dividend after solid third-quarter results. Unsurprisingly, analysts, bloggers and investors are applauding NVIDIA for its good performance, initiation of dividend and also for extending its share repurchase program.

All this is well-deserved for the graphics processing unit (GPU) maker which is now undergoing a transition. But, this transition is what makes me skeptical of NVIDIA as an investment. The company has bet the house on its “4-PLUS-1” Tegra 3 chips, but their absence in top-notch smartphones and tablets so far was a reason behind my bearishness.

Positive Moves, but are they Positive Enough?

However, the presence of Tegra inside the Google (NASDAQ: GOOG) Nexus 7 and the Microsoft (NASDAQ: MSFT) Surface has given the company a push. The Nexus 7 is an acclaimed tablet and has been selling in good numbers, clocking a probable run rate of a million units a month.

As far as the Surface is concerned, the tablet has opened to good reviews. The Surface could do really well, as users would rather buy the device instead of spending on a low-end computer or even the iPad. However, I would rather wait for Microsoft to come out with sales figures for the tablet after the holiday period is over, since that will tell us how it is faring in a tight tablet market.

But, the combined sales of a Nexus 7 and a Microsoft Surface might pale in front of an iPad mini and its bigger brother. Apple (NASDAQ: AAPL) finally went small and its decision seems vindicated after the company sold 3 million iPads in the first weekend, and was “practically sold out of iPad minis.” Now, NVIDIA doesn’t feature in the Apple’s tabletdom and this is another reason why it is unable to profit handsomely from growth in tablets.

The latest IDC report suggests that Apple is losing tablet market share, but it shouldn’t be forgotten that Apple didn’t have a new device whereas second-placed Samsung, Asus and Amazon.com had released their devices after the 3rd generation iPad was released in March this year. With the refresh of the bigger iPad and the iPad mini, Apple can once again get back at Android tablets on whom NVIDIA is counting upon for growth.

Cramped for Room

And speaking of Android tablets, Samsung is occupying the second spot and NVIDIA doesn’t power Sammy’s tablets either. Hence, the company doesn’t count the leaders of the tablet revolution on its client list and this is a cause for concern.  Take a look yourself by clicking here.

NVIDIA is counting on tablets to replace PC’s and has pinned its hopes on the burgeoning tablet market. NVIDIA’s thinking is not wrong, but execution of the strategy would be a major challenge. Apple and Samsung jointly command almost 70% of the tablet market and NVIDIA’s chances of landing a design win here look pretty difficult to me at the moment.

Both Apple and Samsung use their own processors in most of their devices, and hence, the possibility of another vendor winning that spot is quite remote. This could prove to be a pain for NVIDIA.

Beware the (Snap)Dragon

The story is the same in smartphones, with Apple and Samsung using their own chips and Qualcomm (NASDAQ: QCOM) occupying the lion’s share of the mobile processor market. With its army of Snapdragon processors, Qualcomm is successfully riding smartphone growth. The company’s Snapdragon S4 processors can power smartphones of different categories, with the S4 Pro processor being the cream of the lot.

The Snapdragon powers the best of devices such as the Lumia 920 and also found its way inside the U.S. version of the Galaxy S III. Qualcomm certainly looks like the new Intel and NVIDIA will face really tough competition from the Snapdragon in the smartphone market.

The Takeaway

Tegra faces a lot of challenges. NVIDIA is transitioning to mobile and expects the Tegra processors to power major tablets, but that is not happening at the moment. 30% of NVIDIA’s revenue comes from its non-PC segment and it will take a lot of effort for the chipmaker to successfully walk in a post-PC world and ride the growth of mobile computing.

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, Microsoft, NVIDIA, and Qualcomm. Motley Fool newsletter services recommend Apple, Google, 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.

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