NVIDIA Backs Out of Mainstream Phones

The mainstream smartphone chip business is an ugly one, and NVIDIA has decided that it's just not worth pursuing.

Mar 27, 2014 at 10:00PM

Take a look at the mobile system-on-a-chip, or SOC, landscape today -- in particular on smartphones. What do you see? You see Qualcomm (NASDAQ:QCOM), essentially owning the high-end market; Qualcomm and MediaTek in a tug-of-war for high-volume mass-market phones in Asia, and a number of other Asian vendors such as Allwinner, Rockchip, and Spreadtrum fighting for the scraps. It's a brutal business.

Why is it so brutal? Barrier to entry. For the low-cost mainstream devices, these chips need to be cheap; and within a fixed price, they still need to offer as much functionality and performance as possible. Thanks to the ubiquity and quality of off-the-shelf intellectual property, or IP, from ARM Holdings and Imagination Technologies, the focus is on enhancing the non-computing parts of the SOC for both functionality and low cost (think video decoding blocks, modems, connectivity, and the like).

In this business, if you over-design your chip and end up with one that's too expensive (or, worse, late), then you're not getting the sale. If you under-design the chip and end up lacking on performance or features, you, once again, don't get the sale. With so many competitors duking it out with much of the same IP, getting your SOC wrong is deadly to your business.

The market share numbers have spoken
According to Strategy Analytics, here were the top apps processor vendors by market share in 2013:

Vendor

Smartphone Share

Qualcomm

54%

Apple

16%

MediaTek

10%

Others

20%

In the "Others" category you have the following vendors (this list is not exhaustive):

  • Broadcom
  • Intel
  • NVIDIA (NASDAQ:NVDA)
  • Spreadtrum
  • Allwinner
  • Rockchip
  • ST-Ericsson

The overall market is still growing, and, frankly, a very strong and focused player could wrestle away share from Qualcomm, or, to a lesser extent, MediaTek, but it's not for the weak-hearted or those without the willingness to eat gross/operating margin dirt in order to make real headway.

NVIDIA no longer focused on mainstream phones
With the Tegra 4i (codenamed "Grey"), NVIDIA had hoped to make a real dent in the value smartphone market. With an integrated LTE baseband (courtesy of the company's Icera acquisition), and a pretty solidly performing part, there was a lot of hope that NVIDIA could become a real competitor to Qualcomm in lower-cost phones. It seems that NVIDIA believes that this market is no longer one it should be spending its resources fighting for.

Indeed, the following question and subsequent answer from NVIDIA CEO Jen-Hsun Huang essentially confirms that the Tegra 4i could perhaps be the first -- and last -- NVIDIA effort for mainstream phones:

Analyst: So, a lot of detail on virtually every segment of your business, but not too much on the cellular front. I was wondering, is that an integral part of the Tegra strategy and do you need cellular to continue in your roadmap?

Jen-Hsun Huang: So, we also didn't talk about PC OEMs today. And let me tell you why, because in the final analysis those are design wins; they come and go. Let me give you some -- I'll say some things I believe. Now, we are going to get design wins in tablets in very important companies, super-phones in important companies, and we're going to continue to. I believe that the mainstream smartphone market is saturated and it's not worthwhile to pursue.

It doesn't get much clearer than this, and, frankly, NVIDIA is likely better for it, as it doesn't really need to win in the mainstream smartphone market for Tegra to be successful. Remember: NVIDIA's R&D investment in Tegra is about $600 million (per GTC 2013), and so at 50% gross margins, the company needs $1.2 billion in sales to break even, and then from there the business is at scale.

Can tablets, automotive, and other markets help Tegra win?
So the question is whether Tegra can hit that $1.2 billion in revenue mark to break even and from there grow into profitability. The tablet market is, according to IDC, going to come in at about 260 million units, and assuming NVIDIA can capture 10% of that market at $25-per-unit average selling price (remember: NVIDIA is playing only in the high end), that gets us halfway there.

The other half is going to have to come from automotive and perhaps other applications. It's anyone's guess as to whether NVIDIA can grow its non-tablet Tegra business to north of $600 million a year, but management likely wouldn't continue to invest in Tegra if it didn't believe that it could eventually get the business to scale.

Why I'm investing $117,238 in this one stock
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

Ashraf Eassa owns shares of Broadcom, Intel, Imagination Technologies, and Nvidia. The Motley Fool recommends Intel and Nvidia. The Motley Fool owns shares of Imagination Technologies, Intel, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers