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Can NVIDIA Rebound in 2011?

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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.

NVIDIA's just one company riding several megatrends heading into 2011. If you're looking for some other ideas for strong outperformers in the year ahead, The Motley Fool has created a brand new free report called "The Motley Fool's Top Stock for 2011." In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here -- it's free.

Intel and Microsoft are Motley Fool Inside Value selections. NVIDIA, BMW, and Nintendo are Motley Fool Stock Advisor recommendation. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Cirrus Logic, Marvell Technology Group, Microsoft, Qualcomm, and Texas Instruments. Try any of our Foolish newsletter services free for 30 days.

Eric Bleeker owns shares of NVIDIA. You can follow him on Twitter @bleekertech. 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.

Read/Post Comments (10) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 10, 2011, at 10:45 PM, baldheadeddork wrote:

    Did someone call for a nVidia skeptic?

    Not to rain on their parade, but a ten million unit order from one of the smaller smartphone manufacturers is closer to wishful thinking than a rumor.

    I'm not surprised that Tegra performs well on Android tablets for the reasons you mentioned, but we're talking about a market that is going to be much smaller than the smartphone market, and will likely struggle to define itself between the iPad and readers like the Kindle. With all the money nVidia has put into Tegra it needs to be on smartphones. Android tablets alone isn't going to save this project.

    The auto market is going to be miniscule. The Audi A8 sells in the hundreds per month worldwide. Tesla, if they get to production, will also be a micro-niche product. But even if they get into a top selling car it's going to be under a million units a year. This is the killer in the SoC business - the margins are so small that you have to sell in the millions of units just to have a hope of breaking even.

    And Project Denver dials up another round of R&D spending at a time when their revenues are underperforming. NVDA's saving grace has been its health cash reserves. This will erode that strength, and I'm not sure for what. The market of ARM processors is already overcrowded and I don't see nVidia bringing anything compelling to the table. They're going to have a hard time competing against players like Qualcomm at the low end and their high end GPU's are going to have a hard time competing on price and power consumption with Intel and AMD x86 CPU's.

  • Report this Comment On January 11, 2011, at 12:22 AM, TMFRhino wrote:

    I think it'd be anything but unwise not to stay skeptical. Couple of follow up points to the article:

    - The initial automobile stuff is admittedly pretty nichey. You're absolutely correct that neither Audi/Tesla moves the needle at all. However, I do think being a first mover and getting established in that market could reward the company well down the road. It's not a stretch to believe most cards would have infotainment systems within three years. In retrospect, turning the analytical side of the brain up and the gadget nerd side off, there's about 50 million cars made a year and not all of them will be open to a $20+ SoC. So, barring some kind of segment I'm not aware of, a $1 billion TAM could be ambitious. However, being a first mover and getting ahead in the field could be a key side opportunity to gain that scale you spoke of if smartphones keep struggling. That being side, yeah, the "cool gadgets" factor probably led to me writing about that a little longer than I should have.

    - Tablets remain to be seen. I'm pretty bullish on Apple retaining a healthy lead in the segment so it'd be contradictory for me to proclaim this one of the game changers that could make NVIDIA a continuing outperformer. However, you look at a product like Xoom which could probably move 2-3 million over three or four months, along with some other decent wins, and it gets Tegra to (or beyond) its previously stated revenue goals.

    I'm pretty torn on NVIDIA at the moment. I'm not bullish on Tegra in smartphones, but now I need to weigh Project Denver along with a broader parallel computing mega trend that has always intrigued me. Despite all the Tegra talk, continuing progress in HPC's along with some smoke clearing on the ARM vs. Intel debate will probably determine how I play NVIDIA in the future. Perhaps perversely, with the recent settlement news, Intel will be funding the drive against it.

    Anyway, my .02 (beyond my initial .02 :)).

    Thanks for the comments,


  • Report this Comment On January 11, 2011, at 3:31 AM, TheBlindCat wrote:

    Great article Eric.

    It's certainly no slam dunk for NVIDIA, but they are saying all the right things and their success will boil down to execution, it will need to be flawless to outflank Intel and AMD. The 1.5 Billion from Intel over the next 5 years certainly helps.

    Like you, I'm a huge iPad fan (using it right now), but I have to say, my next tablet purchase will be a 7" Tegra 2, just haven't figured out which one (I really like Notion Ink as well but looking for a smaller form factor, and of course honeycomb).

    This is also the year my wife and I replace our 3 year old LG phones, she is determined to get an iPhone (on Verizon), as for me I am leaning toward the LG Optimus 2X (with Tegra 2), especially if it supports LTE, though I do really want to get my hands on a dual Cortex-A9 with an AMOLED display.

  • Report this Comment On January 11, 2011, at 9:53 AM, TMFRhino wrote:

    Thanks BlindCat,

    I see you continued the CAPS series on, good stuff. I liked that idea.

    Personally, I'm dead set on an iPhone when it hits Verizon (Have been very disappointed in my Droid). Sigh... I'm becoming one of *those* people. :)


  • Report this Comment On January 11, 2011, at 11:10 AM, jargonific wrote:

    NVDA is among the most shorted stocks. Cramer and others who facilitate this are talking about it daily. Where a company like JMP Securities suddenly downgrades a flying stock I get suspicious. Thus I checked this site and found many folks there listed.

  • Report this Comment On January 11, 2011, at 11:29 AM, jargonific wrote:

    The VZ deal involves Apple's Iphone 4 using CMDA technology. What does it mean to NVDA that this announcement was made? Thanks

  • Report this Comment On January 11, 2011, at 1:48 PM, TMFRhino wrote:

    Hey jargon,

    Absolutely nothing. None of that announcement affects NVIDIA, aside from possibly reducing the Android's market size, which is its key smartphone market with Tegra.


  • Report this Comment On January 11, 2011, at 10:32 PM, serRenely wrote:

    Jargonific, what exactly do you mean about the insiders and jmp for nvda?

  • Report this Comment On January 12, 2011, at 4:39 PM, UWHuskyinVA wrote:

    Hey Eric...

    Thanks for the tweet... tried to respond but Twitter wouldn't let me. Anyway... I read lots of MF stuff and just stumbled onto some of your articles... good stuff. How about that Holiday Bowl? I'm cautiously optimistic about '11 and ready to enjoy March Madness... Go Dawgs!

  • Report this Comment On January 13, 2011, at 1:37 AM, TMFRhino wrote:

    Hey HuskyinVA,

    I'm just numb to sports right now, Seahawks beating the Saints, the Holiday Bowl, mens basketball starting 4-0 in the Pac... Good things like this aren't supposed to happen to Seattle sports! :)

    '11 football should be good, we'll see how the Price/Montana QB situation shakes out. I'm cautiously optimistic too. Fact is, Locker had a down year and we still finished out strong. It'll be a tough schedule though... Even Eastern just won the subdivision title, no breaks!

    Little more optimistic about basketball, have gotten to hit a few games at Hec Ed this year and its definitely the best team since the Brandon Roy/Robinson days. N'Diaye is a nice complementing piece (athletic with height), and MBA has finally started playing tougher and scoring down low. He's always been an enigma. Great moves down low, but terrible at finishing and lacking a rebounding presence. Anyway, a big part of the strong Pac-10 start is him coming alive.

    Unfortunately we're losing Gaddy and now (under very unfortunate circumstances) it looks like Overton might be off the team too. So... buckle in, it might be bumpy for a bit.

    Anyway, yes, go Dawgs!


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