NVIDIA Reveals Something Shocking

NVIDIA (NASDAQ: NVDA  ) is often asked at various investor conferences if it will be the "next TI." This is, of course, a reference to the fact that Texas Instruments (NASDAQ: TXN  ) decided to give up attempting to compete in the mobile applications processor world. The harsh truth was that the R&D required to really compete effectively in this space is staggering and without meaningful market share/revenues, competing in this business is doomed to be a money sink for investors. Indeed, NVIDIA's Tegra division has already lost over $400 million during the first three quarters of its current fiscal year.

Would bailing on Tegra even save a lot of money?
At the recent BMO Technology & Digital Media conference, an analyst boldly asked the following question,

When do [sic] you guys going to shutdown Tegra and return even more of cash to investors? How does [sic] sort of give up on this mobile effort? How does, I think you have spoken to this a little bit, but how does [sic] Jen-Hsun or you sort of react to that situation?

Interestingly, the NVIDIA representative had the following to say with respect to the major losses in Tegra,

And so, if we were to shutdown Tegra, you don't save as much money as you would think. So that's not effective as the way we allocate cost, which is perhaps in retrospect now that we're hearing these questions, first person to have asked that is -- perhaps was something we should have told that more when we told about how we allocated costs.

This is pretty interesting. While it was always pretty clear that NVIDIA did leverage a great deal of the development of its traditional GPU architectures in the development of Tegra, it's interesting to hear that the R&D leverage is actually quite a bit higher than the losses in the division would tend to suggest.

On one hand, this is great for the Tegra division as it suggests that the likelihood that NVIDIA actually exits this business (which is, frankly, the most exciting business NVIDIA has from a pure growth perspective). On the other hand, this does mean that the other businesses (which are exceptionally profitable) may not be as profitable as the numbers would suggest.

How Tegra can succeed over time
NVIDIA has been pretty upfront about the fact that its Tegra business isn't just about phones – it's about powering compute devices that benefit from a differentiated graphics processing unit. While NVIDIA is likely to gain share in the smartphone and tablet markets if it can build a track record of consistent execution with Tegra, there are plenty of other places to play.

For example, NVIDIA's automotive/in-vehicle infotainment business has about $1 billion-2 billion worth of business already booked (and should be recognized over the next several years as the cars with NVIDIA's chips ship). This is an area that NVIDIA rival, Intel (NASDAQ: INTC  ) , has also cited as an area of strength at its recent analyst day. On top of that, there are other areas such as point-of-sale terminals and arcade gaming machines for which Tegra would be particularly well suited.

Finally, if NVIDIA's Tegra 4i and/or its upcoming Tegra 5 turn out to be smash hits, NVIDIA could eventually gain enough momentum to breakeven and eventually turn a profit in Tegra from smartphones and tablets alone. While these markets are difficult and cutthroat (Intel and Qualcomm are the giants here), NVIDIA has done well in profitable and cutthroat businesses in the past (in the early 90's there were dozens of PC graphics chip manufacturers; today there's only a handful).

Foolish bottom line
It's becoming even clearer that NVIDIA has no intentions of becoming the "next TI" – it's going to fight tooth and nail to bring Tegra to profitability. While it's a difficult road ahead, and while the company's GPUs can (and will) be expanded into more lucrative (but more niche) areas, NVIDIA's management seems set to become a leader in the low power system-on-chip market and, in the process, a compelling growth story in the semiconductor space.

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Read/Post Comments (7) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On December 19, 2013, at 12:49 PM, jwtrotter wrote:

    Really? This is a non-story. Tegra isn't going anywhere and trying to fish for something about R&D from a very non-descript quote is a little desperate in my opinion to make an article.

    Looks more and more articles will be coming as the many that like to short Nvidia will struggle to make money near term as the company continues to grow. They will just have to go elsewhere to camp out and hope for larger swings or major pullbacks to make money.

  • Report this Comment On December 19, 2013, at 1:13 PM, KenLuskin wrote:

    This author has been desperately trying to get a job at Intel, Nvidia, and other companies, which explains the constant puff pieces.

    It also explains the constant bashing of their major competitor AMD.

    This is just another in a long line of ZERO info based articles, that supplies NO analysis.

    BTW, did you notice that there was NO article noting that the new Mac Book Pro does NOT have Nvidia graphics?

    I wonder why?

    Could it be that AMD offers competing graphics at a better price?

  • Report this Comment On December 19, 2013, at 1:33 PM, TMFAeassa wrote:

    @ Ken Luskin

    I'm sorry you feel that way, but if I wanted a job at Intel, NVIDIA, or other companies, I would simply apply. After applying, I would probably be asked in for a round of technical interviews. Following those, I would either be offered a job or not.

    Whether I write positively or negatively about a company's stock has absolutely no bearing on any employment decisions that those companies make.

    -AE

  • Report this Comment On December 19, 2013, at 1:35 PM, TMFAeassa wrote:

    @ jwtrotter (roundhouse_c)

    I'm confused on two points:

    (1) There is no intent to manipulate stocks here.

    (2) If you check my disclosures (TMF has a strict disclosure and trading policy), you will see that I am currently long NVDA (and I have been for over a year).

    I'm not sure where the criticism comes from, but I would be happy to elaborate on anything that I perhaps didn't convey clearly.

    Regards,

    -AE

  • Report this Comment On December 19, 2013, at 3:40 PM, hfp wrote:

    @ Ken Luskin

    I do not understand your comment. I think the new Mac Book Pro does have an Nvidia graphics (beside of the ones with Intel's Iris Pro graphics processor). Also, suppose it had no NVidia graphics (and keep in mind it really does NOT carry an AMD graphics) -- what do think would THIS mean?

  • Report this Comment On December 19, 2013, at 4:20 PM, mycardbrokedown wrote:

    hfp - he refers to powemac not mac book pro. Which is fitted with 2 Fire Pro AMD cards. And no you can't get an NVIDIA card in the new Power Mac as it's a very custom design to say the least..

    AE - Please provide 1, I really mean 1 positive article on AMD, the way you write your negative ones. Have 1-2 positive things about amd taken out of context that you DON'T try to demolish with with arguments... Just like this article where you just took a clear as day thing... NVIDIA needs to shut down tegra as fast as possible without loosing money... Yet you manage to find a "positive" twist to it. Like you do with any Intel or NVIDIA bad news... Please provide 1 article...

    just 1 article Ashraf, please!

  • Report this Comment On December 19, 2013, at 4:30 PM, mycardbrokedown wrote:

    @jvtrotter... tegra is @ what now? generation 5? Any major wins? Anything sold yet? Dropping tegra would actually give much more hope to invest. And NVIDIA more time & money to focus on projects like denver or others that will be able to counter knights landing from Intel by 2015...

    Nvidia needs to focus on server space where it has huge margins and huge potential to grow and let kiddies toys like tegra die off. Even ION was a better project then tegra... and it still was a failure. Nvidia will never get any foothold in mobile as long as qualcomm and it's adreno line have something to say about it... just as a reminder... adreno, the sole reason tegra never got any foothold as a superior graphics chip is the old ATI mobile division. Plus Qualcomm just has a far to good grip in the market atm and the graphics difference tegra-adreno never was worth mentioning...

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