Is Qualcomm Scoring One of NVIDIA's Juiciest Spots?

Last year marked incredible success for NVIDIA (NASDAQ: NVDA  ) in the tablet market. The graphics specialist scored two of the highest-profile tablet launches throughout 2012: Google's (NASDAQ: GOOGL  ) Nexus 7 and Microsoft's Surface RT.

Those were some serious wins that showed that the Tegra 3 was a worthy contender in the market for tablet application processors, while Qualcomm (NASDAQ: QCOM  ) was able to hold down most of the smartphone fort with its connectivity advantages. With cellular-enabled tablets gaining popularity to get things done on the go, it seems that Qualcomm may be about to score one of NVIDIA's juiciest spots from last year.

Who will win the next Nexus?
Earlier this week, Pacific Crest analyst Michael McConnell reiterated his "sector perform" rating on NVIDIA while reducing his estimates, because he believes that that the company has lost the spot in the next version of the Nexus 7 to Qualcomm.

The first-generation model of Big G's flagship tablet probably sold close to 3 million units last quarter, assuming it comprises the majority of Asus' tablet shipments. Pacific Crest's analysts believe that Google will ship up to 10 million units over the next year or so. At an average selling price of $20 to $25 per Tegra chip, that would translate into lost revenue of $200 million to $250 million.

In McConnell's view, based on "supply chain conversations," the two primary reasons for the switch would be pricing factors, and the desire to source the application processor and 3G/4G baseband modem from a single supplier to streamline logistics. Specifically, he believes that Qualcomm's Snapdragon APQ8064 chip will be featured in the next Nexus 7 instead of NVIDIA's new Tegra 4.

The sniff test
There are a number of potential holes in this reasoning, though.

First off, if Google were interested in using a single supplier (which is entirely reasonable), why wouldn't it simply utilize one of Qualcomm's chips that offer integrated cellular connectivity in the first place, like the MSM8960, instead of using a stand-alone applications processor combined with a discrete baseband modem? The newest Tegra 4 can also serve up LTE when coupled with one of NVIDIA's Icera i500 discrete modems, so Google could still achieve a single-source supplier with NVIDIA.

The only explanation I can think of for using separate chips is that it could provide flexibility to accommodate for LTE frequency fragmentation. In doing so, Google could keep the same applications processor while swapping out the baseband, depending on what country and LTE frequency is needed. The tricky part here is that Google wasn't even willing to do this with its flagship Nexus 4, which lacks LTE, because Google only wanted to make one single model with broad compatibility. This strategic goal precluded the inclusion of LTE in its newest smartphone. Would it be willing to change its tune for an LTE-equipped tablet?

Furthermore, the APQ8064 is a previous-generation Snapdragon S4 Pro that was found in numerous high-end Android devices last year. At CES last month, Qualcomm announced its next generation of Snapdragons, the 600 series and 800 series that they are currently sampling, and devices carrying these chips should make their way to market by as early as the second quarter for the 600 series.

If Google switched to the APQ8064, then that would mean the search giant is picking an older-generation Snapdragon over the newest Tegra. The company is certainly looking to save on costs, because it sells the Nexus 7 around breakeven, but shipping the tablet with such an older processor to save a couple of bucks still seems suspect, considering the significant performance gains that tablet processors are still realizing each year. The top-of-the-line Snapdragon 800 series are expected to deliver performance gains of 75% compared to the previous generation.

Lost the win?
As a Qualcomm investor myself, I would certainly like to see the company score the Nexus 7 spot, but at the same time, there are some critical questions that need to be asked when it comes to this newest speculation that NVIDIA has lost the Nexus win to its larger rival. Some of the reasoning behind the rumor doesn't pass the sniff test.

NVIDIA has had remarkable success in tablets, and some of that momentum can be expected to carry over into 2013. I'm not so sure that NVIDIA lost this win.

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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 11, 2013, at 12:08 AM, jwtrotter wrote:

    The Icera baseband modem wouldn't need to be 'swapped out'. Do you realize that? Since it is designed to accommodate multiple frequencies via software (SDR), the hardware would not need to be changed.

  • Report this Comment On February 11, 2013, at 12:58 AM, joshpritchard wrote:

    According to Fudzilla, their sources are saying that Nvidia lost the design win due to a delay in getting the Tegra 4's into production. They didn't have the full story on what the cause of delay was, just that Qualcomm got the win because Nvidia couldn't supply their chips in time.

  • Report this Comment On February 11, 2013, at 3:25 AM, jwtrotter wrote:

    Jen stated at CES that they were still sampling and not in full production yet. I had gotten the clear impression there wouldn't be many new devices featuring Tegra 4 until May or June in any case. If Google is trying to have Nexus 7.7 out sooner, that would be a 'perceived' delay, not unexpected according to Nvidia themselves.

  • Report this Comment On February 11, 2013, at 12:02 PM, joshpritchard wrote:

    If the Tegra devices were intended to come to market in May, then they need to have them in production already, in order to get them to OEMs in order to have their overall designs finalized and start production. Nvidia, like other component suppliers, sell their parts to the manufacturers roughly a quarter ahead of when the end manufacturers do. the same is true for discrete gpus. that's why Q3 was NVDAs strongest quarter, and then they guided down slightly for the quarter they're about to report. they may still beat, especially if demand in the asian markets was strong in the last quarter, which it tends to be. All of this stuff about timing of component suppliers vs. device manufacturers is in the most recent quarter's earnings call transcript (see the analyst Q&A section) if you care to look it up and see how Jensen Huang explained it.

  • Report this Comment On February 11, 2013, at 3:58 PM, jwtrotter wrote:

    Yes, Josh, I know . . my argument still holds about the announcements in MWC and what Jen said at CES. He said that production hadn't really ramped up yet at CES.

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