NVIDIA Just Built a Tablet, but Why?

On Wednesday, NVIDIA (NASDAQ: NVDA  ) revealed Tegra Note, a new "tablet platform." It combines a hardware design featuring the Tegra 4 processor with proprietary software from NVIDIA. A variety of NVIDIA's hardware partners will customize and sell Tegra Note tablets in time for the 2013 holiday season.

NVIDIA just announced a new tablet platform, the Tegra Note. Source: NVIDIA.

Fellow Fool Steve Symington -- who has provided more details on the new Tegra Note here -- believes that this tablet could be a big difference-maker for NVIDIA. Moreover, from his perspective, there is no real downside for the company.

However, I'm becoming increasingly skeptical of NVIDIA's strategy. Whether this move has potential downside for NVIDIA depends largely on the exact business arrangements being implemented. The upside is clear: If the Tegra Note becomes a hit, it could give a much-needed shot in the arm to the Tegra business. Unfortunately, that seems very unlikely to happen due to brutal competition in the "budget tablet" market.

The game's not worth the candle
In early July, I argued that there's essentially no money to be made in the low-cost tablet market. Barnes & Noble (NYSE: BKS  ) ignited a price war in June when it decided to get out of the tablet market, slashing its 7-inch Nook HD from $199 to $129 and its 9-inch Nook HD+ from $269 to $149. Three months later, both tablets are still on sale at those prices, and Barnes & Noble appears to have no shortage of inventory.

Barnes & Noble slashed the price of its Nook HD in order to clear inventory. Source: Barnes & Noble.

Competitors like Amazon.com (NASDAQ: AMZN  ) and Hewlett-Packard responded with their own price cuts. Amazon's 7-inch Kindle Fire HD has now been discounted from $199 to $159 for a long time. The same can be said for HP's less-powerful Slate 7, which has been selling for $139.99 ($30 below the list price) for most of its life.

NVIDIA's new Tegra Note should offer better performance than any of these competing tablets, which are all somewhat dated at this point. However, it will be hard to beat Google's (NASDAQ: GOOGL  ) new Nexus 7 tablet, which hit the market this summer. The updated Nexus 7 is priced at $229, slightly above the Tegra Note's $199 price point. The extra $30 might be worth it: The Nexus 7 blew most other Android tablets out of the water in performance tests.

Moreover, it is an open secret that Amazon will be updating its Kindle Fire lineup in the next month or two. Given the company's history, the new batch of Kindle Fire tablets are likely to boast solid hardware specs and be priced at or even a little below cost.

Amazon has discounted the Kindle Fire HD, and a new model is on the way. Source: Amazon.com.

In short, it's going to be pretty hard for NVIDIA's tablet to get noticed in this crowded market. There are other top-notch tablets available in a similar price range and a bevy of cheaper tablets for people who just want something "good enough."

Who takes the risk?
It's hard to imagine the upside scenario (i.e., the Tegra Note selling like wildfire) materializing. That said, if NVIDIA doesn't have to put much money on the line, then there's no downside and nothing for shareholders to worry about.

However, it's not clear yet how costs will be shared between NVIDIA and its partners. Will NVIDIA have to pay for a marketing campaign? If so, then it will incur some sunk costs: if the tablet doesn't sell well, NVIDIA would not get much of a return on its marketing investment.

Inventory risk is potentially an even bigger issue. If NVIDIA shares the cost of building Tegra Note tablets with its partners, then it would be on the hook for a potential inventory writedown if it had to cut prices to boost sales. Microsoft faced this situation earlier this year and had to take a $900 million writedown for the Surface RT tablet.

Given the brutal price competition that has characterized the tablet market recently, it would be rash to overlook this writedown risk. Of course, if NVIDIA's partners are assuming all of the inventory risk, than this wouldn't be a concern for NVIDIA itself.

Foolish bottom line
As a NVIDIA shareholder, I'm willing to give the company some leeway because it has a lot of promising projects in its pipeline for the next few years. That said, the Tegra Note doesn't seem likely to be a rousing success. The budget Android tablet market is pretty brutal. Google and Amazon seem happy to sell high-quality tablets at cost, while Barnes & Noble and HP appear to be selling their offerings below cost just to move inventory. (There are also plenty of less-reputable tablets selling for under $100.)

Realistically, NVIDIA shareholders should be happy if this project provides any positive contribution to the company's earnings. Hopefully, NVIDIA's partners are assuming all of the inventory risk, in which case the only potential downside for NVIDIA is wasted advertising. Given the state of today's tablet market, the Tegra Note faces an uphill battle to become relevant.

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Read/Post Comments (8) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On September 19, 2013, at 6:27 PM, EngineerPaul wrote:

    "The updated Nexus 7 is priced at $229, slightly above the Tegra Note's $199 price point. The extra $30 might be worth it: The Nexus 7 blew most other Android tablets out of the water in performance tests."

    This is misleading. The QCOM Nexus 7 does well against older tablet designs because it has a current-generation processor, which gives it a notable lift against older chips. The Tegra Note's T4 is also a strong contender from the latest generation and is comparable in most benchmarks and better in some. So, for $30 more you get a comparable chip with comparable performance.

  • Report this Comment On September 19, 2013, at 6:49 PM, jwtrotter wrote:

    Nvidia shareholder .. right. I think your comments about the new tablet say more about your role as a 'shareholder' then the real performance or value of the new tablet. It's not focusing on the screen resolution at this price point but adding features that no other tablet has yet. If you can't see that and how that makes this tablet offering unique, then maybe you should just move onto another company that's content to make the products that simply repeat what's already out there. The earlier comments further reinforces how your analysis is questionable in motive since you aren't using comparable chips in the specs.

  • Report this Comment On September 19, 2013, at 8:34 PM, wgcross2 wrote:

    None the less, I have no intention of giving up my current laptop. A tablet simply won't/can't do. I've always been a fan of NVIDIA and will remain curious as to what they come up with. It might be possible that I will treat myself to a new toy depending on what NVIDIA presents and the price. Other than that, I can't see entering the tablet craze.

  • Report this Comment On September 19, 2013, at 9:39 PM, MichalTod wrote:

    Nvidia is simply following the same strategy it has done, successfully, with add in video cards. It creates white box products that its resellers then market the crap out of in the areas where they have strong distribution. Later, the more serious companies build custom versions of the Nvidia products. Nvidia creates a solid, baseline version that everyone else can use, and also iterate on.

    Having said all that, it doesn't mean that the strategy will work with tablets. However, I can't see how this won't help; if Nvidia can't sell into this market then the whole Tegra on tablets has to be called into question. I suspect they will do well.

  • Report this Comment On September 19, 2013, at 9:40 PM, MichalTod wrote:

    Oh, and I own shares of Nvidia.

  • Report this Comment On September 20, 2013, at 12:33 PM, wuzelwazel wrote:

    The suggestion that the Nexus 7 (2013) is a performance leader and that this Tegra 4 based tablet will not be comparable is laughable.

    Granted that leaked pre-release benchmarks should be taken with a grain of salt, but the "Tegra Tab Premium" scored 27,643 in AnTuTu. The Nexus 7 (2013) scored 18,428 in AnTuTu.

    Even if we allow for a margin of error in the pre-release benchmark (which may swing either way) I doubt the Nexus 7 could make up the 1.5x benchmark difference.

    The only real challenge I see for NVIDIA is that it doesn't have mainstream brand recognition in the market. Neither do many of the slated partners (perhaps with the exception of HP). If you're not Google or Samsung you're hindered from the starting line.

  • Report this Comment On September 20, 2013, at 3:08 PM, TMFGemHunter wrote:

    Thanks for the comments everybody. Just to clarify, when I said that "it would be hard to beat" the new Nexus 7, I meant just that. The Tegra Note might be as good as the Nexus 7, but I would be surprised if it's actually better.

    The Nexus 7 is already in the market, whereas the Tegra Note won't be available for a month or two. Moreover, the Nexus 7 already has brand recognition in the tablet market whereas the Note doesn't. Add in the fact that Amazon's going to be pushing new Kindle Fires for the holiday season, and I can't see this tablet selling more than a couple million units this year. I would love to be proven wrong.

    Adam

  • Report this Comment On September 20, 2013, at 10:29 PM, zwixard wrote:

    I believe NVIDIA's purpose is to secure a place in the tablet market. Tegra has claimed a big market share in the tablet world, including Microsoft RT and Google Nexus 2012. Now that Google Nexus 2013 changed to Snapdragon, NVIDIA must do something. Other brands with Tegra inside will be priced at or below $200. Given their role in Nexus 7 2012, I am confident to package this tablet in my product.

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