Please ensure Javascript is enabled for purposes of website accessibility

Here's How NVIDIA Corp.'s Tegra Processor Business Performed in Fiscal 2018

By Ashraf Eassa – Apr 25, 2018 at 6:40PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The segment saw a huge boost driven by the Nintendo Switch and automotive sales.

For years, graphics giant NVIDIA (NVDA -0.66%) has built a line of processors called Tegra. The Tegra chips are known as systems-on-a-chip, or SoCs, meaning that they incorporate most of the critical functionality -- like processor cores, graphics processors, and other accelerators -- onto a single chip. 

NVIDIA had originally aimed the Tegra processors at applications like smartphones and tablets, but the chips ultimately weren't successful there. The company's focus with respect to Tegra shifted, then, toward automotive applications (e.g., in-vehicle infotainment systems) as well as dedicated gaming devices.

An NVIDIA Tegra 3 chip.

Image source: NVIDIA.

In its most recent fiscal year (2018), NVIDIA reported that sales of its Tegra processors grew by 86% compared to the prior year to $1.53 billion. That was an acceleration from the 47% growth that this business enjoyed in the company's prior fiscal year. Let's go over what drove that increase. 

The Switch effect

Nintendo's (NTDOY -1.01%) popular handheld game console, the Nintendo Switch, is powered by a customized version of NVIDIA's Tegra X1 processor

Thanks to the success of the Nintendo Switch, NVIDIA reported a stunning 300% year-over-year increase in revenue "from SOC modules for gaming platforms and development services."

This isn't too surprising considering that Nintendo shipped 14.8 million Nintendo Switch units during its first year on the market, and the prospects for the console appear positive, as Nintendo keeps rolling out new first-party titles and third-party developers bring their intellectual properties to the platform as well. 

NVIDIA was smart to work with Nintendo on the Nintendo Switch, as this design win has breathed new life into NVIDIA's Tegra processor business. 

Automotive sales are on the rise

Another area in which NVIDIA's Tegra processor family has found success is in the automotive market, powering in-vehicle infotainment solutions. According to the company, its sales of Tegra processors into the automotive industry grew by 15% during fiscal year 2018 "primarily from infotainment modules, DRIVE PX platforms and development agreements for self-driving cars." 

The bit about infotainment modules is straightforward, but the other two items might not be.

DRIVE PX is the marketing name for NVIDIA's self-driving car platforms. These platforms often incorporate both NVIDIA Tegra processors as well as NVIDIA's stand-alone graphics processors (though NVIDIA has signaled that, over time, it intends to boost the performance of the Tegra processors to eliminate the need for the stand-alone graphics processors). 

Today, DRIVE PX is mostly used for development rather than for deployment as self-driving car technology is, itself, still a work in progress. The hope, however, is that as self-driving cars go mainstream, NVIDIA's chips will power many of them, leading to a significant boost in NVIDIA's Tegra processor revenue. 

And, finally, NVIDIA talks of "development agreements" with respect to the Tegra processor revenue increase. NVIDIA is pretty vague about what such agreements entail, but my best guess is that customers (prospective self-driving car manufacturers) are paying NVIDIA to develop hardware and software to enable their vehicles. 

The dynamics of the Tegra business

Although NVIDIA's automotive efforts get a lot of attention in the press (especially since self-driving cars and artificial intelligence are very popular buzzwords these days), the real star of NVIDIA's Tegra processor business seems to be the company's chip sales to Nintendo.

The good news for NVIDIA is that the Nintendo Switch is a highly successful console and given how well the partnership between NVIDIA and Nintendo seems to be going, I wouldn't be surprised to see NVIDIA supply chips into Nintendo's future game consoles. 

The main risk for NVIDIA is that the successes and failures of game consoles are highly unpredictable. For example, the Nintendo Wii was a huge hit, but the follow-on console, the Wii-U, was widely considered to be a flop (for some context, the Nintendo Switch has already surpassed the lifetime sales of the Nintendo Wii-U). If Nintendo can't follow the Switch with another winner, then NVIDIA's Tegra processor business could suffer, too. 

Automotive design wins, on the other hand, tend to be pretty sticky -- that is, once a design is won, a supplier can count on a steady stream of revenue from that design for years to come. Moreover, NVIDIA isn't reliant on sales to a single automaker -- it provides infotainment modules to many car manufacturers, which reduces its risk.

NVIDIA's path forward, then, is likely to continue to support Nintendo as best as it can, while still committing significant resources to try to grow its automotive chip business.

Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

NVIDIA Corporation Stock Quote
NVIDIA Corporation
NVDA
$121.39 (-0.66%) $0.81
Nintendo Co., Ltd. Stock Quote
Nintendo Co., Ltd.
NTDOY
$50.97 (-1.01%) $0.52

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
332%
 
S&P 500 Returns
104%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.