At the Consumer Electronics Show back in January, graphics-chip specialist NVIDIA (NASDAQ:NVDA) showed off a new portable gaming device that it called Project Shield. As my colleagues Eric Bleeker and Austin Smith discussed at the time, creating Shield was an odd move for NVIDIA.
After all, NVIDIA's core competency is building graphics chips: particularly for hardcore gamers. More recently, it has moved to become a major player in the mobile processor market. While it's understandable that NVIDIA wants to encourage a "marriage" of gaming and mobile computing, building its own portable gaming system could make investors wonder whether the company is losing focus.
On Wednesday afternoon, investors got another reason to worry. With Shield scheduled to go on sale the following day, NVIDIA announced that shipments will be delayed until July because of a third-party mechanical component that did not meet NVIDIA's standards. Is NVIDIA in trouble, or is this a minor incident that will have no lasting impact on the company?
Safeguarding the brand
As Patrick Moorhead of Forbes recently wrote, NVIDIA's decision to delay Shield was wise if there really was a quality control problem. Had the company released a faulty product in its first foray into the device market, it could have doomed the entire project.
That said, it's disturbing that NVIDIA got so close to the launch date before deciding to postpone it. Since Shield was supposed to go on sale on Thursday, retailers who are carrying the device probably have faulty units already in stock, which now need to get shipped back to NVIDIA and fixed or written off. Furthermore, if it took until the last day to recognize and react to this quality control issue, it's possible that other issues were also missed earlier in the testing process.
Now the company needs to scramble to fix the problem, which could distract management from the core chipmaking business. There have already been some hiccups there recently; the company's Tegra 4 mobile processor was delayed, possibly costing NVIDIA some design wins. Whereas Tegra 3 hit the market (in limited quantities) in December 2011, Tegra 4 is just starting to show up in devices now. That lag in product introductions is much greater than the one-year industry standard.
Another concern is inventory risk. While initial shipments of Shield were probably fairly modest, it could still be expensive to fix or replace all of those units. That's especially troubling when the device isn't expected to earn very high profits; NVIDIA recently dropped the price from $349 to $299 to stimulate consumer demand.
Foolish bottom line
It's possible that this incident will just be a slight bump in the road for NVIDIA. After all, gaming devices aren't NVIDIA's bread and butter -- the company is really relying on its Tegra and Icera mobile chips and its GRID cloud-based graphics cards for future growth. Shield is just a sideshow, at least for now.
The danger for NVIDIA investors is if Shield becomes a costly sideshow. Investors should definitely keep an eye on the company's margins in its next quarterly report, and look out for any disclosures about losses related to this quality issue.
That said, in light of the company's fairly low valuation, good prospects in its core areas of focus, and its significant program to return cash to shareholders, the stock still looks attractive at current levels. If NVIDIA's management can maintain its focus on the company's main growth drivers -- the upcoming Tegra 4i chip and the rollout of GRID servers -- the benefits should overshadow any headwinds from Shield.
Fool contributor Adam Levine-Weinberg owns shares of NVIDIA. The Motley Fool recommends NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.