High-flying chipmaker NVIDIA (NASDAQ:NVDA) was taken to the cleaners in the final quarter of 2018. Its latest set of results and the accompanying guidance were not up to expectations, bringing an end to a golden period that saw the graphics chip specialist deliver rapid growth and beat the broader market handily.

The bad news is that NVIDIA is entering 2019 on the back foot thanks to the cryptocurrency mining bust that has led to excess channel inventory of GPUs (graphics processing units). So the company is finding it difficult to move its cards, and also has to contend with weaker pricing due to the loss of the crypto catalyst.

NVIDIA estimates that the inventory correction will last for a couple of quarters. But that doesn't guarantee a return to its glory days, as NVIDIA faces a big hurdle in the form of rival Advanced Micro Devices' (NASDAQ:AMD) new GPU architecture.

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AMD's new weapon

PC games are getting more complex and graphics-intensive with each passing generation, which is why the demand for more capable and power-efficient GPUs will increase. Shrinking the size of the manufacturing process node is one way to boost GPU performance while keeping a handle on power consumption.

A smaller manufacturing process node means that more transistors are packed closely together in a tinier space. As a result, the electrons travel a shorter distance in a chip that's manufactured using a 7-nanometer (nm) process than in one made using a 14nm process. That's why the chip built on the smaller node will deliver more computing power per watt of energy consumed.

AMD's advantage is that it looks all set to beat NVIDIA to a smaller manufacturing node. The company recently revealed a couple of AMD Radeon Instinct GPUs -- the MI60 and the MI50 -- which are the world's first graphics cards based on a 7nm process. However, these cards are meant for data centers and not for mainstream gaming, though it shouldn't be long before AMD leverages this technology for consumer GPUs.

AMD CEO Lisa Su is scheduled to deliver a keynote at CES 2019 on Jan. 9, where she's expected to showcase "the diverse applications for new computing technologies ranging from solving some of the world's toughest challenges to the future of gaming, entertainment and virtual reality with the potential to redefine modern life."

Gary Shapiro, the CEO of the Consumer Technology Association, which is organizing CES 2019, was quoted in a press release as saying that Su will provide "a picture of the next-generation of computing that will help redefine the future of gaming and virtual entertainment." So there's a strong possibility that AMD could unveil consumer-grade GPUs based on the 7nm manufacturing process soon.

NVIDIA is reportedly looking to launch its own 7nm GPUs sometime in 2020. So AMD could be the first one with a 7nm consumer graphics card to the market, beating NVIDIA, which recently launched new cards based on the 12nm process.

Where does NVIDIA stand?

AMD has done well to gain ground in discrete GPUs of late, but NVIDIA fought back impressively during the third quarter. Jon Peddie Research's discrete GPU market report for the third quarter of 2018 put NVIDIA's market share at 74.3%, up substantially from 63.9% during the second quarter.

However, it remains to be seen how the company's latest 20-series GPUs perform. NVIDIA launched its new graphics cards in September, and initial reports haven't been that great. High pricing, limited performance gains, and quality issues could haunt NVIDIA in the final quarter, adding to the cryptocurrency-driven pains.

There have been reports that some of NVIDIA's top-of-the-line RTX 2080 Ti graphics cards have run into problems because of quality control issues. Third-party analysis and user reports suggest that the cards are overheating.

The bad PR could give AMD a leg up over NVIDIA in the near term and make the latter's turnaround difficult. NVIDIA expects a decline in sales this quarter and its top-line growth is expected to slow down big time in the coming fiscal year. As such, there might be a shift in the momentum in the discrete GPU space next year as AMD pushes its 7nm cards into the market, while NVIDIA faces the fallout of a botched product launch and excess channel inventory.

 

Harsh Chauhan 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.