NVIDIA Hit by a Double Whammy

NVIDIA (Nasdaq: NVDA  ) is in the soup. The latest earnings report tells us that the company's traditional business is losing steam, whereas its mobile chipset business, which is still at a nascent stage, has fallen flat on its face.

Now it's time to take a closer look at what is bothering NVIDIA and why it may continue to experience rough weather ahead.

GPU business going wrong...
NVIDIA's core business of manufacturing graphic chipsets for PCs is facing strong headwinds. The Thailand floods last year disrupted the supply chain of hard disk drives, hampering PC sales. In the just-concluded quarter, the company's revenue declined 11% sequentially, breaking a trend of consecutive growth seen over five quarters.

NVIDIA's problems continue to add up. The company's GPU division, which makes up for more than half of its revenue, is expected to face a difficult time in the coming quarters due to the aftereffects of the floods. The possibility of a rebound in this division also seems remote, as smaller computing devices such as tablets, smartphones, and Ultrabooks are gaining ground.

...and mobile computing in serious trouble
Last year, I told you how NVIDIA was trying to capitalize on consumers' growing preference for mobile computing platforms. It clinched impressive design wins, and the Tegra 2 chip was gathering momentum. But now, the company has floundered badly in this segment. And there are three distinct reasons for the drop in NVDIA's mobile computing business, which fell 42% sequentially:

  • NVIDIA had to find a way inside top-selling devices to succeed in the mobile computing space, and that's where it came up short. Their chips are found mostly on Android-enabled tablets which have yet to take off, unlike the iPad from Apple (Nasdaq: AAPL  ) .
  • And, if that wasn't enough, the company committed a marketing blunder. NVDIA released the Tegra 2 processor early in 2010 and announced the Tegra 3 chip just when the earlier release was gaining traction. As a result, orders for Tegra 2 chips were held back as customers preferred waiting for the updated version.
  • The competition is doing its bit as well. NVIDIA now sees Samsung, an existing customer, as a threat to its business. The Korean company supplies chips to other manufacturers, notably Apple, and it's expected that Samsung will now use its own chips.

The Foolish takeaway
NVIDIA has withdrawn its full-year guidance as its struggles seem nowhere near the end. The acceptance of the Tegra 3 chips and turnaround in the PC market will define how the stock performs in the long run.

In such circumstances, it's prudent to keep a watch on NVIDIA and see when it can stage a comeback. We will help you do just that through our free Watchlist feature, where you can add the stock to your Watchlist.

Editor's note: A previous version of this article stated that Texas Instrument's OMAP and Qualcomm's Snapdragon chips power the iPhone.  This is not the case.  The Motley Fool regrets the error.

Fool contributor Harsh Chauhan owns none of the stocks mentioned in the article. Motley Fool newsletter services have recommended buying shares of NVIDIA. Motley Fool newsletter services have recommended writing puts in 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.


Read/Post Comments (10) | Recommend This Article (18)

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 February 17, 2012, at 1:11 PM, DAG1996MF wrote:

    This is a joke right? "stage a comeback"... "the PC market will define how the stock performs in the long run" NVDA has come within pennies of its one-year target within the first six weeks of the year, is now pulling back and they need a "comeback"? lol And a company that has products in so many industries unrelated to the dying desktop market is dependent on revival of the PC market? Someone clearly needs to consider doing some homework first the next time they get the urge to start opining.

  • Report this Comment On February 17, 2012, at 1:16 PM, catsrevenge wrote:

    @ Harsh Chauhan > This extremely negative and bearishly slanted article is obviously written by someone with the glass half empty mentality, bearishly thinking mind. Someone whom obviously buys Puts and Shorts Nvidia stock (Nasdaq) NVDA.

    Anyone reading his article just keep this fact in mind, because these are very twisted,blown out of proportion and inaccurate assumptions being made by the writer of the above article about an otherwise world class company with solid financials and technicals. Listen to the Nvidia Earnings report from Wed 2/15/12 then YOU decide

    copy/paste the link below to any browser to hear the OFFICIAL Conference Call

    http://edge.media-server.com/m/p/6ye4ypg2/lan/en

  • Report this Comment On February 17, 2012, at 1:23 PM, TMFNewCow wrote:

    Niether TI's OMAPs or Qualcomm's Snapdragons power any iPhone.

    -- Evan

  • Report this Comment On February 17, 2012, at 4:42 PM, splixx wrote:

    That's odd... I just read about the next TRILLION DOLLAR REVOLUTION... all about NVDA and how they're at the center of it.

    http://www.fool.com/newsletters/18/sfr/36/01.htm?source=isas...

  • Report this Comment On February 18, 2012, at 9:26 AM, DAG1996MF wrote:

    @sandshifter, Thanks for sharing that. It's clearly a much better thought out and supported argument. Any idea when that analysis was written/posted?

  • Report this Comment On February 19, 2012, at 8:40 AM, TechJunk13 wrote:

    @djohn1969

    Well, if you consider that PCs are still in demand in the Emerging Markets (read as India and China where 36% of the world's population resides and is still growing) there is no reason to believe that the PC market cant make a comeback. And NVIDIA's bread and butter is the desktop market and if you are a prudent investor then you need to understand how important is it for the core business to grow or remain strong with tym.

    Regards,

    Harsh

  • Report this Comment On February 19, 2012, at 1:18 PM, philsevile wrote:

    I recently read an email from the Motley Fool proclaiming Nividia as the stock that will lead us to the 'Promised Land'.

  • Report this Comment On February 19, 2012, at 7:28 PM, ne1k0 wrote:

    This article doesn't even start to touch the potential NVIDIA has with news of an integrated GPU/ARM CPU in the works:

    http://blogs.nvidia.com/2011/01/project-denver-processor-to-...

    Microsoft's decision to build Windows 8 for the ARM architecture puts NVIDIA in a very nice position to compete with the likes of Intel in both the PC and mobile markets.

  • Report this Comment On February 21, 2012, at 12:26 AM, DAG1996MF wrote:

    VCRs are still in demand in emerging markets too, but that doesn't mean there is tremendous growth potential in the sale of VCRs. Desktop computers (aka PCs) are going away everywhere (including emerging markets) to be replaced by smartphones, tablets, etc. But that's all beside the point - NVDA is clearly very well-positioned and has a big role in either the obvious future or the alternative future of a return to a PC-driven market. In either case, NVDA is nowhere near dependent on a return to a PC-driven market.

  • Report this Comment On February 22, 2012, at 8:45 AM, TomLansford wrote:

    catsrevenge comment was a good one.

    Listen to the financial webcast, then make up your mind.

    Knowing the company well, my $0.02 :

    NVIDIA has always been in relatively volatile markets because it is always driving technology. NVIDIA created the GPU market. It is a new situation for NVIDIA that the base of their revenue comes from a stable market (PCs). Today their leadership & growth will come in mobile tech for high-volume and GPU-computing for high-margin.

    The company also has a long history of executing on its plan. I am hard pressed to think of another tech company besides Intel which has so consistently executed on its business.

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