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Could someone pass me a towel? I seem to have some egg on my face.
In early August, I asked whether NVIDIA (Nasdaq: NVDA ) should consider abandoning its Tegra processor. I pointed to the company's 40% increase in R&D over the previous two years -- thanks largely to Tegra development -- and contrasted it with the company's 10% drop in sales, asking, “Where's the beef?”
NVIDIA needed to deliver on some of its oft-promised design wins. In recent weeks, it seems to have done just that.
Ghosts of failures past
Recent reports suggested that tablet and smartphone aspirants Acer, Asus, Toshiba, and Samsung had all presumably placed large orders with NVIDIA. Samsung's order alone was pegged between $250 million and $350 million. If that report proves true (which is far from assured), it'd be a massive order, since estimates of Tegra pricing estimates top out around $25 a pop.
Mind you, we've heard this story before. Remember when NVIDIA had supposedly won a place in the next-generation DS? Well, it turned out that while Tegra was tested for use in the DS, Nintendo ultimately went with a cheaper processor. Likewise, presumed tablet wins at a host of major OEMs vanished. But not this time.
When it rains, it pours
At CES, the electronic industry's annual trade show, Tegra finally flexed its muscle. Motorola and Toshiba demonstrated a 10-inch tablet running Tegra. Acer showed off a Tegra tablet, Asus showed off at least two, Dell's Streak update is Tegra-powered, and lesser-known companies also rolled out Tegra designs. Before the show, Caris analyst Craig Ellis counted 14 tablet wins for NVIDIA. That put it eight wins ahead of rival Texas Instruments (NYSE: TXN ) , while also outpacing Freescale and Marvell (Nasdaq: MRVL ) .
Tablets aren't the only game in town for Tegra, though. The chip also scored a number of automotive wins. While NVIDIA bragged of landing a spot in select Audi vehicles last year, it followed up by actually driving a Tegra-equipped Audi A8 onto the stage this year.
Further development with Audi was supplemented by successes with both Tesla Motors (Nasdaq: TSLA ) and BMW. Tesla's use of Tegra in particular was an eye-catcher; the company is using Tegra to power a massive 17-inch display that takes up almost all the center-console real estate in its next generation of cars.
Upon Tegra's launch, NVIDIA projected that the automotive market presented a billion-dollar opportunity by 2013. That prediction could prove prescient -- especially in high-end auto sales, where companies aim to differentiate with luxury touches. The relatively low price of a high-powered system on a chip (SoC) like Tegra, combined with large screens offering touchscreen controls, GPS, and real-time traffic updates is a no-brainer. NVIDIA shouldn't be the only winner in this trend, either. The trend toward “infotainment” offerings in cars should also benefit Cirrus Logic (Nasdaq: CRUS ) , which offers advanced audio options targeted specifically at infotainment systems.
Meet the new boss, much different than the old boss
So while Tegra still has a long way to go before it becomes the growth engine powering NVIDIA, it appears to be on solid footing. In retrospect, questioning whether NVIDIA should scrap Tegra was both foolish and premature. I underestimated the timing needed to engineer new devices around the SoC, and overestimated Tegra's reliance on smartphone wins to drive its success.
I was partially lulled into my smartphone-centric thinking by estimates released by NVIDIA itself. As you can see from the chart NVIDIA released in 2009, smartphones were seen as the dominant market opportunity for Tegra.
Source: Company presentation.
However, between 2009 and today, a few key technology shifts occurred.
- Handset companies using Android, NVIDIA's best bet to crack the smartphone market, overwhelmingly favored Qualcomm's (Nasdaq: QCOM ) focus on integrating communications components like the 3G radio, rather than NVIDIA's multimedia-heavy sales pitch.
- The overwhelming success of the iPad, and later follow-on success of the Samsung Tab, highlighted the budding tablet opportunity. Tablets are a much better market for NVIDIA's raw horsepower sales pitch.
- Microsoft announced that the next version of Windows would work on both ARM Holdings (Nasdaq: ARMH ) processors (like Tegra) as well as traditional x86 processors (the kind made by Intel and AMD).
The cumulative effect of these technological shifts was that Tegra found a second key mobile opportunity in tablets, which now provided a foundation to push the company into competing with both AMD and Intel in processors.
This last shift should prove the most interesting. At CES, NVIDIA unveiled Project Denver -- its attempts to integrate central processors using the ARM instruction set with its graphics processors to power everything from PCs to supercomputers. Observers have long speculated whether NVIDIA would be crushed by Intel and AMD's attempts to integrate central processors and graphics processors. Last week, we finally saw the company's response. Its work on Tegra laid the groundwork for the massive opportunity Project Denver presents.
Miles to go before I sleep
So NVIDIA had a great CES, finally delivering those delayed design wins I'd clamored for back in August. More importantly, with Project Denver, it unveiled an ambitious program that could redefine the company. Clearly, Tegra and NVIDIA's work on the ARM instruction set are now key to the company's success.
However, while optimism from all this news shot the company's stock up 29% over the past week, the battle ahead remains long and full of pitfalls. Whether rival tablets can unseat the iPad -- for Tegra to succeed in tablets, they must -- remains to be seen. More importantly, Project Denver's goal of taking on Intel head to head is daunting, and should continue to drain gobs of research & development away from the bottom line.
In the coming years, the plight of owning NVIDIA will remain the same. The company is overvalued if it remains what it is today: a consumer graphics card company with a smaller side business in high-end computing and mobile devices. However, it's also a potential world-beater if any of its other initiatives take off.
No matter how the future of the company pans out, it'll be interesting to watch.
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