Don't Expect Shield to Move NVIDIA Stock... Yet

Earlier this week, I explained a few reasons why I'm convinced now is a great time to buy NVIDIA (NASDAQ: NVDA  ) stock.

The company not only beat estimates for both revenue and earnings per share with its latest quarterly report, but also achieved record gross margin for the second consecutive quarter. In addition, NVIDIA has returned more than $146 million of its $3.71 billion cash pile to shareholders so far this year in the form of dividends and share repurchases, and management plans to return at least another $850 million when all is said and done in 2013.

What's more, NVIDIA expects an even better second half of the year thanks mainly to a large number of Tegra 4 processor design wins so far, and its valuation remains reasonable at just 16 times trailing earnings -- or nine times earnings if you back out all that cash.

Oh, and there's Shield, too
Now, as fellow Fool Evan Niu so kindly pointed out, NVIDIA has just announced it will begin taking pre-orders for its new Android-based, Tegra 4-powered handheld gaming system, Project Shield.

Image source: NVIDIA.

For those of you keeping track, recall Shield was originally announced in January at this year's Consumer Electronics Show, and it admittedly seemed an odd sideshow for NVIDIA to enter an already-crowded, weak segment of the gaming market. As a result, NVIDIA stock dropped following the announcement as analysts eyed its growing R&D expenses while year-over-year net profit fell.

To be sure, investors are still wondering why NVIDIA created Shield in the first place. In fact, the irony seems almost palpable as one of NVIDIA's own official blog posts from just a couple weeks ago bore the title "NVIDIA CEO: You Bring the Devices, We'll Bring the Graphics."

So what, exactly, is NVIDIA trying to accomplish? Is the company trying to have its cake and eat it, too?

As I suggested in January, I don't think anybody really believes Shield will completely take the world by storm in and of itself. Remember, we're talking about a $349 device that targets a niche market of gaming enthusiasts. Meanwhile, fellow gaming industry player Sony  (NYSE: SNE  ) only finally saw stagnant sales for its competing Playstation Vita device improve after it recently dropped the price to $249.

But there are things that set Shield apart, too. For one, not unlike an Android-based smartphone, Shield gives gamers access to the Google  (NASDAQ: GOOGL  ) Play game market as well as NVIDIA's own TegraZone. In addition, for gamers with a compatible GeForce GTX graphics cards, the device also provides the ability to seamlessly stream their favorite games from their gaming PCs via WiFi.

In the end, though, while some folks might really enjoy the device, it's hardly a game changer.

The thing is, I think NVIDIA knows it.

The bigger picture
Instead, I'm convinced NVIDIA is using Shield not as a way to significantly boost sales and earnings but instead as an avenue through which it can raise awareness for its platform-independent, cloud-based GRID gaming solution.

Image source: NVIDIA.

As NVIDIA reminds us on its website, the rest of the entertainment industry is already migrating to cloud-based streaming models "by delivering unlimited content to consumer devices, including smartphones, tablets, PCs, and TVs," at the same time noting millions of users now enjoy the convenience of streaming video and music through the likes of Netflix (NASDAQ: NFLX  ) , Hulu, Spotify, and Pandora (NYSE: P  ) . Heck, even Disney's (NYSE: DIS  ) ABC television network just announced the awesome move to begin streaming its shows live online in New York and Philadelphia, and the entertainment giant plans to expand to other markets by the end of this Summer.

NVIDIA goes on to reason:

It's only natural that gaming -- the fastest growing media segment and a $68 billion industry -- would follow this trend. NVIDIA is building on a unique legacy in gaming graphics and graphic performance to lead the way in defining the cloud-gaming experience. 

Shield should serve as a perfect warm-up, then, for consumers to begin embracing NVIDIA's long-term, platform-free vision for the gaming industry.

Of course, I also own NVIDIA stock, so I won't complain if Shield surprises me and becomes a huge hit with a broad user base. In any case, whether Shield is a success in the traditional sales sense doesn't particularly matter, and I certainly won't be letting go of my shares anytime soon.

More expert advice from The Motley Fool
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  • Report this Comment On May 15, 2013, at 10:40 PM, ocre wrote:

    Your take is an interesting reasoning which for sure could play a role into why nvidia made shield but i dont think that is nearly as deep as it goes. ........

    I think shield serves on multiple levels. To me, the device is not as important as the direction. You really got to step back a few feet to get a broader view.

    Nvidia is now fully committed to ARM and are in it for the long haul. So to me shield is multipurpose. In one a act it is an attempt to sway or push android in a direction that is ripe for nvidia. If at the very least they only bring a higher level/hardcore gaming interest to android then nvidia wins big time. Bringing developers attention (heck everyone's attention) to android in a new way. That this platform can and will be an outlet for a higher class superb gaming. Just bringing this interest sets the stage for nvidia as they continue to develop more capable CPUs, Nvidia has a massive understanding and know how when it comes to gaming.....with android starting to become a serious gaming environment, nvidia will take the cake.

  • Report this Comment On May 16, 2013, at 5:25 PM, jwtrotter wrote:

    I like where this writer is headed on Shield because it doesn't cave to the sentiment that it has to be a major revenue stream for Nvidia and a direct competitor of dedicated game consoles to be successful. I think the insight is right in that Nvidia is treating this product like a win-win scenario to open up new awareness of what GRID and other major revenue drivers for the company can provide. If they sell Shield for a decent profit, not really high margins, they are not only 'not losing money' but gaining another foot in the door for future customers, including small companies and other cloud based services.

    Many of the AMD fanbois just don't get it and are desperately knocking the Shield as a failed non-starter. Simply not the case . . in some ways, I think Jen likens the Shield to Google's attitude with innovation, like in their new eyeglass device. However, I think Shield has more immediate benefits for the gaming community than that new eyeware :).

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