Should Investors Get Excited About NVIDIA Corporation's Mobile Business?

Following a disappointing year in 2013, NVIDIA's mobile business seems to be on the rise again, thanks to a strong automotive segment and a focus on high-end devices. But even if revenues keep increasing down the line, will this translate into returns for investors?

Jun 3, 2014 at 12:00PM

NVIDIA (NASDAQ:NVDA) is a household name thanks to their GPUs, which have been a key component of the PC gaming experience for years. But the company is also coming up with innovative extensions to this core business, and it's found success in adapting GPUs to high-performance computing and virtualizing desktops in the cloud. However, the most intriguing initiative is the Tegra system on a chip, NVIDIA's move into the mobile chip business.

Going beyond the GPU
The idea behind Tegra is to combine the high performance of NVIDIA's desktop GPU with the low power consumption needed in the mobile world. For example, Tegra 4, which was released last year, offers 72 GPU cores and a 4-core application processor, coupled with an additional core that's in charge of saving power.

Over the past several years, Tegra has been included in some notable devices, such as the first two versions of Microsoft's Surface tablet. However, revenue from Tegra in 2013 was only $398 million, 8% of NVIDIA's total. Even more worryingly, Tegra revenue decreased 48% from the previous year, as slowing sales of Tegra 3 products weren't offset by increases in Tegra 4 sales.

At first sight, this might look like a failed entry into a market dominated by giants such as Qualcomm (NASDAQ:QCOM) and Intel (NASDAQ:INTC). What is NVIDIA's mobile strategy, and how is it working out for the company?

Tablets and phones
On the first-quarter conference call, CEO Jen-Hsun Huang said that phones and tablets are still one of the major drivers of growth for Tegra. In an interview with CNet several weeks later, Huang further explained that NVIDIA is not interested in competing on price for mainstream devices, and instead wants to help build the "Porsche of tablets or phones."

In the phone market, Tegra will mostly be competing against the high-end 800 tier of Qualcomm's Snapdragon chip line. While the Tegra 4 outperforms the current versions of Snapdragon, Qualcomm is releasing a more powerful chip, the Snapdragon 805, later this year. Considering that cellular is Qualcomm's core business, and one in which it has a dominant 66% share, NVIDIA has its work cut out.

As for tablets, NVIDIA does have one significant design win with Xiaomi's iPad Mini competitor, the Mi Pad. On the other hand, it appears that Microsoft's Surface 3 will be powered by Intel rather than NVIDIA. Intel recently reported that its mobile and communications group posted a $3 billion loss in 2013, showing the level of determination and competition that NVIDIA will be going up against in this market.

More than just phones
NVIDIA has stated that the mobile opportunity is bigger than just phones, and that, as a "performance-oriented company," it will go after markets that can benefit from its high-end chips. One opportunity is mobile gaming, and NVIDIA expects that this will be a valuable business down the line.

But currently, the most promising driver for mobile growth is automotive. Tegra chips drive infotainment systems in the Audi 3 and the Tesla Model S. Also, the Tegra K1, which NVIDIA calls the "first mobile supercomputer," is powering Audi's prototype of a self-driving car. In the first quarter, NVIDIA's automotive segment grew 60% year-over-year, and management stated that they have a $2 billion pipeline going forward .

What this means for investors
Tegra numbers have picked up recently, partially validating NVIDIA's mobile strategy. Earnings have increased sequentially for the last three quarters, and in the first quarter of this year, NVIDIA reported $139 million in revenue from Tegra, a 35% year-over-year increase. Management also seemed upbeat about Tegra's prospects, calling for continued growth in coming quarters, particularly in the second half of this year.

Still, even if NVIDIA's mobile plans turn out as hoped, there are two reasons why investors shouldn't get too excited. First, gross margins on Tegra are lower than the gross margins on GPUs , which ultimately means less incoming cash. Second, whatever profit that Tegra will generate won't necessarily make its way back to investors. NVIDIA has traditionally invested heavily in R&D -- 32.3% of revenue in 2013 -- and CEO Jen-Hsun Huang has stated he would also love to invest more on R&D in the future.

In conclusion
NVIDIA's mobile effort, Tegra, is a good opportunity for the company. In spite of heavy competition in the high-end device market, Tegra might see significant revenue growth down the line thanks to growth in the automotive segment. Nonetheless, it's not clear how much of this will translate into returns for investors, since Tegra has lower gross margins than NVIDIA's GPU business, and since the company likes to invest its profits into expensive R&D.

Will this stock be your next multi-bagger?
Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Srdjan Bejakovic has no position in any stocks mentioned. The Motley Fool recommends Nvidia. 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

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, 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

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